AUD CPA EXAM FINAL REVIEW QUESTIONS
What auditor should consider for firm's client acceptance & continuance policies -
Answers :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 - Answers :determine if financial reporting
framework is acceptable & obtain agreement of mgmt that it acknowledges and
understands responsibilities
Management responsibilities - Answers :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 - Answers :integrity of mgmt,
mgmt disagreements with predecessor auditor, reason for change in auditors, any
fraud/noncompliance/internal control matters & commmunication of those to mgmt/audit
committee/those charged with governance
During audit of new client, auditor should obtain sufficient appropriate evidence about -
Answers :if opening balances contain misstatements & if all accounting policies are
consistently applied
New auditor should review predecessor's documentation of - Answers :planning, risk
assessment procedures, further audit procedures, results, matters of continuing
accounting & audit significance
Engagement letter - Answers :contract between client & auditor to reduce risk of
misinterpretation
For recurring audits, auditor should assess - Answers :if circumstances requires terms
of engagement to be revised
Written engagement letter should include - Answers :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 - Answers :written record of work performed, evidence obtained, &
conclusion reached
Qualities of audit documentation - Answers :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 - Answers :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 -
Answers :part of quality review program, subpoenaed for it, or part of investigation by
AICPA/state CPA society/state statute
Those charged with governance - Answers :people who bear responsibility to oversee
obligations & direction of entity (includes board of directors & audit committee)
Audit committee - Answers :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 - Answers :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 - Answers :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 - Answers :audits & attest services (including reviews);
NOT required for compilations, consulting, tax work
Cases where independence is impaired - Answers :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 - Answers :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 - Answers :objectivity, integrity, & free of
conflict of interests
General standards that apply to all engagements - Answers :professional competence,
due professional care, adequate planning & supervision, sufficient relevant data
Contingent fees rule - Answers :contingent fees not permitted for audits, reviews, most
tax work; fine for compilations if disclosing lack of independence
Acts discreditable rule - Answers :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 - Answers :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) - Answers :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) - Answers :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 of former audit team members in accounting/reporting role at
client, no employment of former audit team members in financial oversight role during 1
year cool off period, no employment at firm of former client employees, no performance
of non-audit services for client, no contingent fees, lead & concurring partner must
rotate off ever 5 years/other partners rotate off every 7 years
Independence is impaired for employee benefit plan audit if - Answers :direct/material
indirect financial interest in plan/plan sponsor, member of accounting firm maintains
financial records for plan
Independence NOT impaired for employee benefit plan audit if - Answers :former
employee of plan/plan sponsor is now employed by firm & has completely disassociated
What auditor should consider for firm's client acceptance & continuance policies -
Answers :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 - Answers :determine if financial reporting
framework is acceptable & obtain agreement of mgmt that it acknowledges and
understands responsibilities
Management responsibilities - Answers :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 - Answers :integrity of mgmt,
mgmt disagreements with predecessor auditor, reason for change in auditors, any
fraud/noncompliance/internal control matters & commmunication of those to mgmt/audit
committee/those charged with governance
During audit of new client, auditor should obtain sufficient appropriate evidence about -
Answers :if opening balances contain misstatements & if all accounting policies are
consistently applied
New auditor should review predecessor's documentation of - Answers :planning, risk
assessment procedures, further audit procedures, results, matters of continuing
accounting & audit significance
Engagement letter - Answers :contract between client & auditor to reduce risk of
misinterpretation
For recurring audits, auditor should assess - Answers :if circumstances requires terms
of engagement to be revised
Written engagement letter should include - Answers :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 - Answers :written record of work performed, evidence obtained, &
conclusion reached
Qualities of audit documentation - Answers :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 - Answers :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 -
Answers :part of quality review program, subpoenaed for it, or part of investigation by
AICPA/state CPA society/state statute
Those charged with governance - Answers :people who bear responsibility to oversee
obligations & direction of entity (includes board of directors & audit committee)
Audit committee - Answers :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 - Answers :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 - Answers :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 - Answers :audits & attest services (including reviews);
NOT required for compilations, consulting, tax work
Cases where independence is impaired - Answers :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 - Answers :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 - Answers :objectivity, integrity, & free of
conflict of interests
General standards that apply to all engagements - Answers :professional competence,
due professional care, adequate planning & supervision, sufficient relevant data
Contingent fees rule - Answers :contingent fees not permitted for audits, reviews, most
tax work; fine for compilations if disclosing lack of independence
Acts discreditable rule - Answers :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 - Answers :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) - Answers :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) - Answers :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 of former audit team members in accounting/reporting role at
client, no employment of former audit team members in financial oversight role during 1
year cool off period, no employment at firm of former client employees, no performance
of non-audit services for client, no contingent fees, lead & concurring partner must
rotate off ever 5 years/other partners rotate off every 7 years
Independence is impaired for employee benefit plan audit if - Answers :direct/material
indirect financial interest in plan/plan sponsor, member of accounting firm maintains
financial records for plan
Independence NOT impaired for employee benefit plan audit if - Answers :former
employee of plan/plan sponsor is now employed by firm & has completely disassociated
