AUD CPA Exam Final Review Questions
with Solved Solutions.
what auditor should consider for firm's client acceptance & continuance policies - Answer
ability to meet reporting deadlines, ability to staff engagements, independence, & integrity of
client mgmt (do we want to be associated with them)
before accepting audit engagement - Answer determine if financial reporting framework is
acceptable & obtain agreement of mgmt that it acknowledges and understands responsibilities
management responsibilities - Answer preparation & fair presentation of financial statements;
design, implementation, & maintenance of internal controls; provide auditor with access to all
relevant info, addtl info auditor may request, & unrestricted access to people necessary to
obtain evidence
inquiries should be made of predecessor auditor regarding - Answer integrity of mgmt, mgmt
disagreements with predecessor auditor, reason for change in auditors, any
fraud/noncompliance/internal control matters & communication of those to mgmt/audit
committee/those charged with governance
during audit of new client, auditor should obtain sufficient appropriate evidence about - Answer
if opening balances contain misstatements & if all accounting policies are consistently applied
new auditor should review predecessor's documentation of - Answer planning, risk
assessment procedures, further audit procedures, results, matters of continuing accounting &
audit significance
engagement letter - Answer contract between client & auditor to reduce risk of
misinterpretation
for recurring audits, auditor should assess - Answer if circumstances requires terms of
engagement to be revised
written engagement letter should include - Answer objective of audit, mgmt responsibilities,
auditor responsibilities (gather sufficient appropriate audit evidence, express an opinion),
limitations of engagement (not providing total assurance, not guarantee f/s free of
misstatements), identification of applicable financial reporting framework, reference to
expected form & content of report to be issued
audit documentation - Answer written record of work performed, evidence obtained, &
conclusion reached
,qualities of audit documentation - Answer divided into permanent & current files, supports
auditor's report/opinion, aids in training & conduct/supervision of audit, provides record of
accumulated evidence, indicates that accounting records reconcile to financial statement,
contains enough info that an experienced auditor with no prior knowledge of client could
understand the work performed
audit documentation assembly & retention requirements - Answer issuers: documentation
must be assembled within 45 days of audit report release & must be kept for 7 years
non-issuers: documentation must be assembled within 60 days of audit report release & must
be kept for 5 years
audit documentation is confidential & can only be disclosed without client permission if -
Answer part of quality review program, subpoenaed for it, or part of investigation by
AICPA/state CPA society/state statute
those charged with governance - Answer people who bear responsibility to oversee
obligations & direction of entity (includes board of directors & audit committee)
audit committee - Answer members of the board of directors (usually independent/outside
directors) who aren't employees or part of mgmt & don't have material financial interests in the
company
audit committee functions - Answer establish control environment, select & appoint
independent auditor, review quality of auditor's work, respond to auditor recommendations,
help resolve disagreements in accounting treatment of material items, & serve as bridge
between board of directors & auditor
communication responsibilities of auditor in financial statement audit - Answer not required
to (but may) search for deficiencies less sever than material weaknesses or express opinion on
internal control; , in writing, both significant deficiencies & material weaknesses to
mgmt/governance within 60 days of report release date; in writing, previously communicated
significant deficiencies/material weaknesses that haven't been corrected; other deficiencies
identified (in writing or orally); can't report absence of significant deficiencies but can report
absence of material weaknesses
independence is required for - Answer audits & attest services (including reviews); NOT
required for compilations, consulting, tax work
cases where independence is impaired - Answer 1. CPA has direct financial interest or indirect
material interest in client
2. audit fees remain unpaid for more than a year
, 3. CPA has mgmt position with client or is employee; spouse can be employee as long as its not
in mgmt or financial reporting role
4. CPA makes hiring decisions for client
5. litigation, unless it is for immaterial amount unrelated to the audit
cases where independence is NOT impaired - Answer 1. with bank client by full insured
checking account (under $250K FDIC limit amount)
2. fully collateralized car loan
all engagements must be performed with - Answer objectivity, integrity, & free of conflict of
interests
general standards that apply to all engagements - Answer professional competence, due
professional care, adequate planning & supervision, sufficient relevant data
contingent fees rule - Answer contingent fees not permitted for audits, reviews, most tax
work; fine for compilations if disclosing lack of independence
acts discreditable rule - Answer retaining client records after they demand return,
discrimination in employment, failure to follow audit standards, making false/misleading journal
entries, failure to file/remit taxes timely, making false claims about abilities, disclosing
confidential info without client consent
threats to compliance - Answer 1. advocacy-promote client interests
2. adverse interest-opposition to client interests
3. familiarity-too sympathetic to client position
4. mgmt participation-take on role of mgmt
5. self-interest-benefit from client relationship
6. self-review-not appropriately evaluating results of prior judgments
7. undue influence-subordinate judgment to client
SOX standards that apply to issuers (PCAOB) - Answer records retention for 7 years, must have
2nd concurring partner review, providing other accounting/financial/actuarial services
prohibited, audit committee preapproval & reporting, partner rotation off every 5 years, can't
have key accounting personnel at firm within one year of working at CPA firm
Regulation S-X independence rules (issuers) - Answer no direct/material indirect financial
interest in client, no employment of covered members by client on board of directors, no
employment of close family in key accounting/financial reporting role at client, no employment
with Solved Solutions.
what auditor should consider for firm's client acceptance & continuance policies - Answer
ability to meet reporting deadlines, ability to staff engagements, independence, & integrity of
client mgmt (do we want to be associated with them)
before accepting audit engagement - Answer determine if financial reporting framework is
acceptable & obtain agreement of mgmt that it acknowledges and understands responsibilities
management responsibilities - Answer preparation & fair presentation of financial statements;
design, implementation, & maintenance of internal controls; provide auditor with access to all
relevant info, addtl info auditor may request, & unrestricted access to people necessary to
obtain evidence
inquiries should be made of predecessor auditor regarding - Answer integrity of mgmt, mgmt
disagreements with predecessor auditor, reason for change in auditors, any
fraud/noncompliance/internal control matters & communication of those to mgmt/audit
committee/those charged with governance
during audit of new client, auditor should obtain sufficient appropriate evidence about - Answer
if opening balances contain misstatements & if all accounting policies are consistently applied
new auditor should review predecessor's documentation of - Answer planning, risk
assessment procedures, further audit procedures, results, matters of continuing accounting &
audit significance
engagement letter - Answer contract between client & auditor to reduce risk of
misinterpretation
for recurring audits, auditor should assess - Answer if circumstances requires terms of
engagement to be revised
written engagement letter should include - Answer objective of audit, mgmt responsibilities,
auditor responsibilities (gather sufficient appropriate audit evidence, express an opinion),
limitations of engagement (not providing total assurance, not guarantee f/s free of
misstatements), identification of applicable financial reporting framework, reference to
expected form & content of report to be issued
audit documentation - Answer written record of work performed, evidence obtained, &
conclusion reached
,qualities of audit documentation - Answer divided into permanent & current files, supports
auditor's report/opinion, aids in training & conduct/supervision of audit, provides record of
accumulated evidence, indicates that accounting records reconcile to financial statement,
contains enough info that an experienced auditor with no prior knowledge of client could
understand the work performed
audit documentation assembly & retention requirements - Answer issuers: documentation
must be assembled within 45 days of audit report release & must be kept for 7 years
non-issuers: documentation must be assembled within 60 days of audit report release & must
be kept for 5 years
audit documentation is confidential & can only be disclosed without client permission if -
Answer part of quality review program, subpoenaed for it, or part of investigation by
AICPA/state CPA society/state statute
those charged with governance - Answer people who bear responsibility to oversee
obligations & direction of entity (includes board of directors & audit committee)
audit committee - Answer members of the board of directors (usually independent/outside
directors) who aren't employees or part of mgmt & don't have material financial interests in the
company
audit committee functions - Answer establish control environment, select & appoint
independent auditor, review quality of auditor's work, respond to auditor recommendations,
help resolve disagreements in accounting treatment of material items, & serve as bridge
between board of directors & auditor
communication responsibilities of auditor in financial statement audit - Answer not required
to (but may) search for deficiencies less sever than material weaknesses or express opinion on
internal control; , in writing, both significant deficiencies & material weaknesses to
mgmt/governance within 60 days of report release date; in writing, previously communicated
significant deficiencies/material weaknesses that haven't been corrected; other deficiencies
identified (in writing or orally); can't report absence of significant deficiencies but can report
absence of material weaknesses
independence is required for - Answer audits & attest services (including reviews); NOT
required for compilations, consulting, tax work
cases where independence is impaired - Answer 1. CPA has direct financial interest or indirect
material interest in client
2. audit fees remain unpaid for more than a year
, 3. CPA has mgmt position with client or is employee; spouse can be employee as long as its not
in mgmt or financial reporting role
4. CPA makes hiring decisions for client
5. litigation, unless it is for immaterial amount unrelated to the audit
cases where independence is NOT impaired - Answer 1. with bank client by full insured
checking account (under $250K FDIC limit amount)
2. fully collateralized car loan
all engagements must be performed with - Answer objectivity, integrity, & free of conflict of
interests
general standards that apply to all engagements - Answer professional competence, due
professional care, adequate planning & supervision, sufficient relevant data
contingent fees rule - Answer contingent fees not permitted for audits, reviews, most tax
work; fine for compilations if disclosing lack of independence
acts discreditable rule - Answer retaining client records after they demand return,
discrimination in employment, failure to follow audit standards, making false/misleading journal
entries, failure to file/remit taxes timely, making false claims about abilities, disclosing
confidential info without client consent
threats to compliance - Answer 1. advocacy-promote client interests
2. adverse interest-opposition to client interests
3. familiarity-too sympathetic to client position
4. mgmt participation-take on role of mgmt
5. self-interest-benefit from client relationship
6. self-review-not appropriately evaluating results of prior judgments
7. undue influence-subordinate judgment to client
SOX standards that apply to issuers (PCAOB) - Answer records retention for 7 years, must have
2nd concurring partner review, providing other accounting/financial/actuarial services
prohibited, audit committee preapproval & reporting, partner rotation off every 5 years, can't
have key accounting personnel at firm within one year of working at CPA firm
Regulation S-X independence rules (issuers) - Answer no direct/material indirect financial
interest in client, no employment of covered members by client on board of directors, no
employment of close family in key accounting/financial reporting role at client, no employment
