NINJA CPA REVIEW

NINJA Notes 2013

AUD Engagement Planning




"
Updated for July 2013 Exams

The NINJA Notes have been updated for the
newly-tested Clarity Standards.

Table of Contents

The N.I.N.J.A. Framework

Update: Clarity Project 8

I. Engagement Planning 13
II. Internal Control 27
III. Auditing & IT 38
IV. Evidence & Risk 44
V. Audit Reports 58
VI. Audit Sampling 69
VII. Professional Responsibilities 80
VIII. International Auditing 88














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The N.I.N.J.A. Framework

NAIL THE VIDEOS

Watch your CPA Review videos first before working any
assigned homework questions.

The CPA Review industry says to watch a section of CPA
Review video and then work the accompanying MCQs. This
perspective stems from the old-school approach to the paper
and pencil exam where you had to sit in a live classroom and
learn from an instructor on weekends.

Today, there is a smarter way to study. You dont have to go
to a weekend live course. You can fire up the laptop on a
Tuesday morning and knock out two hours of material
before you even brush your teeth. If you work MCQs in week
one over your week one topic, guess what? You will work
them again in week 5 or 6 when you review because you will
forget what you learned.

If you watch a video in week one and score an 85 on the
corresponding MCQs, will you be able to score an 85 four
weeks later? Not likely. You will need to work them again
anyway and its not a smart use of study time.

Instead, let the N.I.N.J.A. Framework guide you.

INTENSE NOTES

Repeat after me: PUT THE HIGHLIGHTER DOWN.

Which method do you think will help you learn the material
better painting printed words in a book with pretty
florescent colors or writing them down on a legal pad and
thinking about the information?


$
Grab a stack of legal pads, put the highlighter down, and
start writing.

Many people have said that instead of taking their own
notes, they just re-write the material inside of this study
guide, which is fine too.

NON-STOP MCQS

Now is the time to start working multiple-choice questions
and do them with a focused frenzy. Do so many MCQs that
youre absolutely sick of them. As you encounter little fact
nuggets that you didnt know or are prone to forget, write it
down and add it to your voluminous stack of notes.

JUST RE-WRITE IT

This is where it gets tedious. This is also where the payoff
happens. You may be familiar with the fact that if you had a
choice between $3 Million and 1 doubled daily for 31 days,
the penny doubled for 31 days ends up tripling the $3
Million. The payoff, however, doesnt happen until the 31
st

day. The road is long, but ends up being worth it in the end.

The same goes for re-writing your study notes. The thought
of grabbing that stack of legal pads and going to town re-
writing what youve already written may sound like a
ridiculous suggestion at first, but I am a firm believer in its
impact.

Merely writing down your notes and then reviewing them
before your exam doesnt have near the impact as taking
your furious scribbles and converting them into re-packaged,
easily-digestible fact nuggets.

Not only will your notes mean more when youve whittled
away the non-essentials, but you are actually learning the


%
material twice. Re-processing the material by re-writing your
notes is like letting the information marinade in your mind.
Just like a well-prepared steak, you will taste the payoff of
this extra step.

Dont like taking notes? No problem. Re-write these
NINJA Notes instead. You will absorb the material better
vs. reading only.

Plan wisely because this will likely take a week to
complete.

I have found this to be unbelievably helpful! This is now my
second section that I have followed this piece of advice and,
once again, I am amazed at how much the material "clicks"
as I review and write the notes a second time.

Sure, it's time-consuming, but for me, it is worth it. No
questions asked. Not only does it help with processing and
understanding the material, but it also results in a better,
more organized set of study notes to use for review up until
exam date. Sandy

ALL COMES TOGETHER

You have watched the videos. Youve taken ridiculous notes
and have done hundreds (thousands?) of multiple-choice
questions. Youve re-written your notes.

Now, study that stack of review Gold in your hands multiple
times, work MCQs over weak topics, study your notes even
more, and then go in and PASS the CPA Exam.




&
How to use NINJA Notes

READING

You've invested in the NINJA Notes, now let it go to battle
for you. You should read the them as many times as
possible.

Carry it with you wherever you go.

Do you have an iPhone, iPad, or similar device(s)?

Simply load the PDF onto the device and if you have 5
minutes of downtime, you have 5 minutes of study
time.

It is recommended that you read the NINJA Notes at least
five times leading up to your final two weeks of exam prep.

If you have 6 weeks to study, then you need to complete
this in 4 weeks. 5 weeks to study, then complete it in 3.
4 weeks = 2 weeks. You get the picture. The point is: plan,
plan, plan and budget, budget, budget, budget because
exam day is looming.

6-Week Plan: Approx. 103 pages x 5 reads /4 weeks
/ 7 days per week = Approx. 18 pages per day

5-Week Plan: Approx. 103 pages x 5 reads /3 weeks
/ 7 days per week = Approx. 24 pages per day

4-Week Plan: Approx. 103 pages x 5 reads /2 weeks
/ 7 days per week = Approx. 37 pages per day

3-Week Plan: Approx. 103 pages x 5 reads /1 weeks
/ 7 days per week = Approx. 74 pages per day


'
RE-WRITING

This step is optional, but it won over a lot of skeptics with its
results. This is not mainstream advice. This is the NINJA
way. The mainstream way of studying for the CPA Exam is
old-fashion and outdated.

Forget the old way. You are a NINJA now.



Now is the time to either

1. Re-write your own CPA Exam notes or

2. Re-Write the NINJA Notes.

Plan on investing a week doing this and you should expect to
get through 15 pages a day (Approx. 103 pages / 7) in order
to stay on track.

After this, you will still have one week left to put the
finishing touches on your CPA Exam review prep i.e. doing
a ton of MCQs. (http://www.tinyurl.com/WileyTB)
yI. Engagement Planning


(
I. Engagement Planning

THE AUDITOR

! Provides users of financial information with

o Reasonable assurance that the financial
statements are not materially misstated

! NOT responsible for detecting theft or fraud

o Instead, provide reasonable assurance

! The earlier the auditor is hired prior to the Balance
Sheet Date, the better for audit planning and efficiency

o Audit procedures can be carried out at interim
dates if Control Risk for the accounts/transactions
is low

" Review changes in balances at year-end

" If the year has already been closed, an
auditor can take the engagement if they are
able to overcome the limitations of the
engagement

! An auditor uses Professional Skepticism to

o Plan the Scope of the Audit

o Plan the Objectives of the Audit

! When planning an audit

o Role and involvement of clients Internal Auditors
should be decided


)
o Analytical procedures performed

" Compare Actual vs. Forecasted Data

o If issues relating to Predecessor Auditors work on
previous financial statements come up during the
current audit

" Auditor must have clients permission to
discuss the issue

o Audit procedures that are carried out by assistants

" Were they adequately performed?

Review the working papers

" Are the results consistent with the audit
report?

o Audit Strategy should be mapped out

" What are the reporting objectives?

" What is the scope of the audit?

GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)

! Materiality and Audit Risk are foundations of GAAS

o Measure Auditors

" Professional Qualifications

" Judgment



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PRIOR TO ACCEPTING AUDIT ENGAGEMENT

! Review clients Financial Statements

! Speak to 3rd Parties

! Contact Predecessor Auditor to evaluate whether
engagement should be accepted

o Must Have Permission from Client

" No Permission = No Engagement

o Why the Auditor Change?

o Any Serious Discussions with Audit Committee?

o How is Management Integrity? Disagreements?

o How was Internal Control?

o Understand Industry or Be Willing to Learn

o Consider Scope Limitation

" Limited evidence available = No Engagement

AUDIT ENGAGEMENT AGREEMENT

! Must be written and covers:

o Objectives of Engagement

o Limitations of Engagement

o Responsibilities of Management



*#
" Provide written assertions
o Responsibilities of Auditor

" Limited Error/Fraud responsibility

o Expectations of Access to Records

o Financial Statements (and Disclosures) are
Managements Responsibility

o Compliance with Laws

o Internal Control

AUDIT COMMITTEE

! Part of the Board of Directors

! Corporate Officers Not Allowed

! Responsible for Hiring Auditor

o Oversees Internal Control

o Must Agree with Auditor on

" Responsibility of the Parties

" Audit Fee

" Timing of the Audit

" Audit Plan







*$

o Acts as Liaison Between Auditor and the Board

" Auditor Communicates Concerns about

" Internal Control Deficiencies
" Errors
" Fraud
" Illegal Activities

MATERIALITY

! Quantitative and Qualitative Measurements

! Measured on the Transactional or the Financial
Statement level

o Audit plan based on smallest misstatement that
could be material to Financial Statements

o If materiality thresholds differ among Financial
Statements, then use the lowest threshold
amount. DONT average them.

! Based on Auditor Judgment

o Auditor must consider needs of users

! Audit should be planned to allow reasonable
assurance that no material misstatements exist

! As acceptable Materiality level Decreases

o Auditor must find smaller misstatements

" More individual account testing & testing
closer to Balance Sheet Date



*%

AUDIT RISK

! Audit Risk (AR)

o Inherent Risk x Control Risk x Detection Risk

o Risk that material mistakes, errors, omissions, or
fraud will result in an inaccurate audit report

o Based on Auditor Judgment

o Measured both Qualitative and Quantitatively

! Control Risk (CR)

o Will Internal Control detect error or fraud?

o Auditor cannot control CR

! Inherent Risk (IR)

o Which transactions have a higher level of risk?

o Auditor cannot control IR

! Detection Risk (DR)

o Will the auditor fail detect a material
misstatement?

o Auditor CAN control DR

" Do more testing at year-end

" Increase substantive testing

o Less Acceptable DR = Run More Substantive Tests


*&

o More Acceptable DR = Run Less Substantive Tests

o More Substantive Tests = Less Audit Risk

" Detection Risk decreases

" (!AR = IR x CR x !DR)

o Less Substantive Tests = More Audit Risk

" Detection Risk increases

" ("AR = IR x CR x "DR)

! Quantitative Measurements

o Inherent, Control, and Detection Risk can all be
measured in terms of percentages

! Non-Quantitative Measurements

o Inherent, Control, and Detection Risk can all be
measured in terms of acceptable ranges

FRAUD AND ILLEGAL ACTS

! Managements responsibility to FIND and PREVENT

! Auditors Responsibility:

o ASSESS THE RISK that such things will lead to
material misstatements.

o Design the audit to provide reasonable assurance
against Material Misstatements caused by

" Fraud


*'

" Illegal acts that directly affect the F/S

" If illegal (and not fraud), auditor should
seek to understand the situation and
whether it affects the Financial
Statements

" Material errors

o Report all management fraud to Audit Committee

" Minor fraud by low-level employees?

Dont report to Audit Committee

" Minor fraud by management?

Report to Audit Committee

o Required Inquiries and Procedures

" Management inquiries

" Analytical Procedures

" Discussions with audit personnel about

" Fraud leading to material misstatement

! Fraud is Intentional (Misappropriation)

o Born out of (RIO)

" Rationalization

" Incentive



*(
" Opportunity

! Errors are Unintentional (Misinterpretation)

! Fraud Red Flags

o Current audit procedures may need to be re-
considered if red flags exist.

o Examples of Audit Red Flags:

" Management compensation tied to stock

" Aggressive financial forecasting

" Former auditor disagreed with Management

" Records not available for audit

! A Fraud Risk Factor

o Has been observed in similar situations

" Large sums of cash on hand

" Earnings growth without cash flow

o Does NOT necessarily mean that there is a
material weakness in internal control

" Internal control analysis can result in the
conclusion that Internal Control is weak, but
probably wont identify illegal acts

o Leads to auditor taking action

" Strives to make audit engagement
procedures less patterned and predictable


*)
" Re-evaluates managements application of
accounting procedures
" Finds and assigns audit personnel with
relevant skills in this area

! Documentation

o Any fraud risks identified that could lead to
material misstatement

o Audit procedures performed to assess risks

o Nature of communication made to audit
committee and company management

o Disclosure to third parties regarding fraud not
normally the auditors responsibility

" Fraud by management should normally be
reported to Audit Committee, not SEC

SARBANES-OXLEY ACT OF 2002

! Created the PCAOB

! Designates Officer responsibility for internal control

o Must disclose significant internal control
weaknesses to auditor and audit committee

o Must disclose any level of fraud discovered by
employees with internal control responsibilities

AUTHORITATIVE LITERATURE HIERARCHY

! Statements on Auditing Standards (SAS)
!
! Auditing Interpretations, AICPA Guides & SOPs


"+
!
! Industry Articles (no authority)

QUALITY CONTROL FOR CPA FIRMS

! Firm Leadership exhibits quality and leads by example
and sets the tone for the organization

! Firms should Monitor and document that its policies and
procedures are being followed

! Firms should have Relevant Ethical Requirements

! Acceptance and continuance of client engagements
should continue to be evaluated for

o Client Integrity

" Does management have integrity?

o Auditor Competency

" Is the firm competent enough to take the
engagement?

o Legality

! Firm should have Competent and Ethical personnel

! Firm engagements are performed, supervised, and
reviewed in accordance with professional standards and
regulations

COMPILATION SERVICES

! SSARS - Statements on Standards for Accounting and
Review Services to be followed



"*
o Non-Public entities only

! Independence NOT required for Compilations

o No Internal Control work allowed

o No Assurance given

! A CPA should comply with provisions of SSARS that
apply to Compilation Engagements when preparing
unaudited Financial Statements to a non-public
company to a client or third party

! Must understand client industry

REVIEW SERVICES

! SSARS - Statements on Standards for Accounting and
Review Services to be followed

o Non-Public entities only

! Provides Negative Assurance

! Independence IS required for Reviews (AR 100)

o No Internal Control work allowed

o Performs Analytical Procedures

o No Material Indirect financial interest allowed

o No Immaterial Direct financial interest allowed

! Must understand client industry





""
ATTESTATION SERVICES

! Independence Required

! CPA expresses a conclusion about an assertion

o Is the client compliant with laws?

CONSULTING SERVICES

! Independence not required

PROSPECTIVE FINANCIAL STATEMENTS

! Report is restricted to specified users

! Agreed-upon procedures implemented

ADDITIONAL NINJA STUDY WEAPONS

! 10 Point Combo - http://tinyurl.com/ninja-10

! NINJA Audio - http://www.tinyurl.com/CPAAudio

! Wiley Test Bank - http://www.tinyurl.com/WileyTB