CH1

1. The accountant’s report on the application of accounting principles should include

a statement that should any facts or circumstances differ from those presented to
the acct, the acct’s conclusion may change. The reporting acct should consult with
the continuing CPA to obtain info relevant to the transaction. The use of this
report is restricted to specified parties.
2. When an auditor qualified his opinion b/c of a scope limitation, the working in the
opinion paragraph should indicate that the qualification pertains to the possible
effects on the F/S and do not to the scope limitation itself.
3. GAAP requires to present full se to F/S: B/S, I/S and statement of cash flow. If
one of them is omitted, issue either qualified or adverse opinion. However, is
auditor is asked to audit only certain F/S, it’s okay.
4. Changes has material effect on comparability, the auditor should refer to the
change in an explanatory paragraph added to the auditor’s report. The paragraph
should identify the nature of the change and refer to the F/S note that discussed
the change in detail.
5. Preclude: prevent from happening
6. When an auditor expresses an adverse opinion, the opinion paragraph should
include a direct reference to a separate paragraph disclosing the basis for the
opinion. “In our opinion, b/c the effects of the matters discussed in the preceding
paragraphs, the F/S…”
7. Related party transaction, need to have adequate disclosure. Otherwise, qualified
or adverse opinion.
8. Substantial doubt of going concern, lack of consistently will result in
modified unqualified opinion if there’s adequate disclosure. Lack of
consistency: auditor can also issue a disclaimer even if t here’s adequate
disclosure. If there’s insufficient disclosure, qualified and adverse opinions.
9. For additional supplementary info required by the FASB, but is outside the basic
F/S, the auditor should apply certain limited procedures to the info, and report
deficiencies or omissions of such info.
10. Client prepared document: Auditor should read it. If it is materially inconsistent
with F/S and the F/S do not require revision, the auditor should ask client to revise
the doc to eliminate the inconsistency. If client refuses, auditor will issue a report
with explanatory paragraph or withdraw from the engagement.

CH 3
1. Increasing the extent of test of details will result in a reduction in detection risk.
2. Engagement letter does not generally include specific audit procedures.
3. Preliminary judgments about materiality is generally based on either annualized
interim F/S or annual F/S from a prior period.
4. Materiality levels does not equal to risk of material misstatement. If
materiality level increases, risk of material misstatement would decrease.
5. An increase in materiality level would result in decrease in audit risk, which
would result in less substantive testing.
6. Control risk should be assessed in terms of financial statement assertions. The
auditor identifies I/C relevant to specific F/S assertions, and then performs tests
of controls to evaluate their effectiveness in preventing material misstatements in
those assertions.
7. Detection risk increases: auditor is willing to accept more risk that material
misstatements have not been caught.
8. Extent of tests of details = substantive tests.
9. To assess control risk, auditor evaluates the effectiveness of entity’s internal
control.
10. In a written audit plan, an auditor should establish specific audit objective that
relate primarily to the financial statement assertions.
11. Auditor need to inform those charged with governance any significant
deficiencies in internal control that come to auditor’s attention.
12. During every stage of the audit, the auditor should consider the assessment of the
risk of material misstatements.
13. Active participation of those charged w/ governance serves an oversight role that
strengthens the control environment and lessens the effect of management’s
attitude.
14. The auditor should withdraw from the engagement if the client refused to accept
the auditor’s modified report.
15. The auditor generally is not required to determine whether the client’s
controls operated effectively to prevent to detect material errors. Such
determination would only be required for controls on which the auditor
plans to rely.
16. The audit plan usually cannot be finalized until the considerations of the entity’s
control have been completed.
17. Perform tests of details of transaction to detect material misstatements after
auditor has assessed risk, not as part of making this assessment.
18. Internal control questionnaire provide info about control policies and
procedures.
19. Tests of control are used to assess control risk, not to identify procedures relevant
to assertions.
20. “Substance over form” concerns relate to controls on the surface to exist, but in
reality are not operating effectively.
21. Auditor of service org need to understand effect of the user org upon the service
org. A service auditor report on controls placed in operation, or controls placed
in operation and their operating effectiveness. They do not perform substantive
procedures. Their engagement is not the same as an audit of F/S.
22. Control environment include human resource policies and practices
23. Cost-benefit relationship is a primary criterion that should be considered in
designing the internal control
24. Attribute tests, compliance test and tests of control are all tests that assist the
auditor in assessing control risk and determine the final assessed risk of
material misstatements.
25. In obtaining understanding of control, the auditor is not required to obtain
knowledge about the “operating effectiveness of controls”.
26. An entity’s management is responsible for establishing, maintaining, and
monitoring I/C.
27. A service org’s services are part of an entity’s info system if they affect the
initiation, processing or reporting of the entity’s transactions.
28. The user auditor would make inquiries regarding the professional reputation of
the service auditor, not vice versa.
29. The auditor should consider whether the year end balances of the particular asset
or liability accounts that might be selected for interim examination are reasonably
predictable with respect to amount, relative significance and composition.
30. The lower the assessed level of control risk = the greater the reliance placed on
the control, the more assurance the auditor must gather that the controls are
operating effectively.
31. Tests of controls include such procedures as inspecting documentation, inquiry,
observation, and reperformance.
32. The objective of tests of details used as tests of controls is to evaluate whether an
internal control operated effectively.
33. Confirmation is a substantive audit procedure not appropriate for tests of
controls.
34. Observation of client personnel provides an auditor with the most assurance
about the effectiveness of the operation of an internal control.
35. When an auditor decides not to perform tests of controls, the auditor most likely
concluded that the additional evidence to support a reduction in control risk was
not cost-beneficial to obtain. In other words, the additional costs that would be
incurred to support a lower assessed level of control risk would not be offset by
anticipated cost savings resulting from a lower level of substantive tests.
36. Test segregation of duties = test control
37. The higher the auditor's risk assessment, the closer to period end substantive
procedures should be performed. Conversely, effective control reduce control
risk and reduce the risk of material misstatement, allowing more interim testing
to occur.
CH 4

38. The auditor should obtain bank cutoff statements that include transactions for 10
to 15 days after year-end. The outstanding checks and deposits in transit at year-
end on the bank reconciliation should agree with the information in the bank
cutoff statements.
39. Cut-off testing: an examination of transactions occurring several days before and
several days after year-end, to ensure that they were recorded in the proper
accounting period.
40. Once signed, the check should be mailed to the payee by the check signer or an
employee operating under the supervision of the check signer to prevent
defalcations (tan wu) of checks. Generally this occurs in the treasurer's
department.
41. The standard bank confirmation form include confirmation of both cash balances
on deposit and collateral pledges on loans originating from the bank.
42. Vouching to supporting documents tests the occurrence assertion.
43. Voucher payable department is responsible for approving vouchers for payments.
44. Matching vendor's invoices with receiving reports provides authorization for
payment and is generally performed in the accounts payable department.
Recalculation of vendor invoices is compatible with this authorization function.
45. Vouchers should be approved before payment occurs. Overriding this control to
expedite payment may result in unauthorized payments being made.
46. Quality control standards related to the conduct of a firm's audit practice as a
whole, and compliance with such standards would not be demonstrated by audit
documentation for one specific audit engagement.
47. Audit doc serves mainly to provide 1) the principal support for the auditor's
report 2) assistance in planning, conduct and supervision of audit 3)
accountability 4) useful info
48. When an analytical procedure is performed during the overall review state, there
are no specific documentation requirement. When it's used as the principal
substantive test of significant F/S assertion, the auditor must document, auditor's
expectation, factors considered in development f the expectation, results,
additional audit procedures performed and result of additional procedures
49. If analytical procedures suggest unexpected relationships, the auditor would
perform additional tests of details of the accounts involved.
50. Analytical procedures: compare CY with PY and budgeted with actual
51. The auditor relied on substantive test to achieve audit objective related to
particular assertions.
52. If analytical procedures are used as a test of transactions, they are functioning as
a substantive test rather than a final review procedures. During final review,
analytical procedure is used to identify unexpected account balances or
relationships that were not previously identified.
53. Analytical procedures involve comparison of recorded amounts, or ratios
developed from recorded amounts, to expectations developed by the auditor.
54. The amount of corroborative evidence obtained refers to the sufficiency of the
evidence, not its reliability.
55. 21-23,25-27 ratio questions
56. The auditor's direct personal knowledge (obtained through observation,
examination, inspection, or recalculation) is one of the most reliable forms of
evidence.
57. Strong, effective internal control improve the reliability of data.
58. Negative confirmations are most likely to used when the assessed level of audit
risk, including inherent and control risk, is low.
59. If the total amount of accounts receivable is immaterial, the auditor is not likely
to send any confirmations.
60. Dividend income from investments is tested by referring to the dividend record
books produced by investment advisory services, such as "Moody's dividend
records"
61. Joint custody by two company officials over assets like cash and marketable
securities helps safeguard the asset. Under joint custody, collusion is required to
a defalcation to occur.
62. Since control risk is assessed at a low level, tests of controls would be required to
evaluate the effectiveness of the internal controls to support that assessed level.
Assuming control are operating effectively, only limited substantive testing
would be performed.
63. Testing to see whether equipment listed in the accounting records is physically
present in the plant and still in service is an effective way to test whether
unrecorded disposals occurred.
64. The completeness assertion states that all transactions that should be recorded are
recorded. A/R confirmations rarely provides evidence about completeness since
the recipients of the confirmation have a vested interest in not reporting
understatements. (transactions that have not been recorded).
65. Failure to record sales returns would result in actual inventory quantities being
greater than those recorded in perpetual inventory records.
66. Even if control risk is assessed as low, more effective substantive procedure
should be performed
67. Questions relating to procedures of access controls for assets would not normally
be a part of a questionnaire related to controls over the initiation and execution of
equipment purchases.
68. Cutoff procedures assure completeness and existence of inventory.
69. The assessment of control risk affects the nature, timing and extent of substantive
audit procedures.
70. The use of time tickets to record actual labor worked on production orders is the
best way to prevent direct labor from being charged to manufacturing overhead.
71. In order to maintain accurate perpetual inventory records, periodic inventory
counts should be used to adjust perpetual records.
72. The management representation letter should be signed and dated on the date of
the auditor's report.
73. Examining an analysis of inventory turnover helps identify slow-moving, excess,
defective, and obsolete items included in inventories.
74. Unclaimed payroll checks should be returned to an independent party for follow
up. Returning such checks (asset) to the payroll department (recordkeeping)
represents an inadequate segregation of duties.
75. If a client uses a stock transfer agent, confirmations should be used to provide
evidence of shares authorized, issued, and outstanding, as well as to provide
evidence of the individual transactions.
76. Auditor often review repairs and maintenance account in order to locate items
that should have been capitalized.
77. The auditor would consider subsequent events and transactions occurring before
the completion of the audit, not after.
78. If uncertainties are properly disclosed, the auditor would normally issue an
unqualified opinion.
79. When auditing related party transactions, an auditor places primary emphasis on
evaluating the disclosure of related party transactions.
80. Unusual nonrecurring transactions near year-end characteristic of related party
transactions. Since related party transactions are not at arm's length, management
may use such transactions to bolster sales or assets.
81. The letter of inquiry to the client's attorneys is a request made by the client
management.
82. The A/R turnover ratio is calculated as sales/receivables. More aggressive
collection policies will result in a decrease in the receivable balance, which in
turn cause the turnover ratio to increase.
83. Executives are considered to be related parties regardless of whether or not stock
options at favorable prices are granted.
84. The auditor has four responsibilities with respect to evaluating estimates: to
assess management's practices, to verify that all material estimates have been
developed, to determine that accounting estimates are reasonable, and to ensure
that accounting estimates are properly recorded and disclosed.

CH 5
85. A lower risk of incorrect acceptance requires a greater sample size
86. he increase in population variability results in an increase in sample size, whereas
the larger tolerable misstatement result in a decrease in sample size.
87. Number of items in population generally doesn’t affect sample size until it's very
small (less than 5,000)
88. Net misstatement in sample x sample size = misstatement projected to the total
population (1)
If (1) > tolerable misstatement, there's a unacceptable high risk that the actual
misstatements in the population exceed the tolerable misstatement.
89. The sample size in an attribute sampling application is affected by the allowable
risk of assessing control risk too low, the tolerable deviation rate, and the
expected deviation rate.
90. The sample size in a variables sampling application is affected by the variability
in population (generally represented by the standard deviation), the acceptable
level of risk (i.e. the risk of incorrect acceptance), the tolerable misstatement, and
the expected misstatement.
91. If the auditor assessed the control risk too low, then the true population deviation
rate exceeds the auditor's tolerable rate while the auditor's estimate of the
maximum deviation rate (based on the sample results) was less than the
tolerable rate.
92. Statistical sampling helps the auditor to measure the sufficiency of the audit
evidence because the auditor can quantify the audit risk, thus assisting in limiting
it to an acceptable level.
93. Ratio estimation is most effective if there is a correlation between book value and
audit amounts.
94. Deviation from control activities do not necessarily result in misstatements.
Therefore, deviation from pertinent control activities at a given rate would
ordinarily be expected to result in misstatements at a lower rate.
95. By stratifying the sample, the auditor can examine each of the unusual
transactions and also reduce the sample size.
96. Attribute sampling examines the rate of occurrence in a sample: the attribute
either exists or does not exist. Therefore, attribute sampling is more useful for
tests of controls
97. control risk too low: sample deviation rate is less than the tolerable rate, but the
true deviation rate exceeds the tolerable rate.
98. PPS sampling automatically emphasize on larger items by stratifying the
sample. The disadvantage is that zero balance, negative balances, and
understated balances requires special design considerations.
99. The auditor is likely to increase the level of preliminary assessment of control if
tolerable rate is less than the upper deviation rate.
100. Variable sampling is used to determine whether a given account balance
is reasonable.
101. There is an inverse relationship between the risk of assessing control too
low and sample size: as the allowable level of risk increase, the sample size
decreases.
102. Embedded audit modules are sections of the application program code
that collect transaction data for the auditor. Embedded audit modules are usually
built into the application program w hen the program is developed. This would
require the auditor be involved in the system design of the application to be
monitored.
103. Test data consists of "dummy" data run through the client's computer
system. The data should be processed under the auditor's control.
104. Test data allows the auditor to determine whether adequate controls exist
over data processing. Test data consists of fictitious entries or inputs that are
processed through client's computer system under the control of the auditor.
105. The test data approach refers to a technique is which the client's
application program is used to process a set of test data. The result of which are
already known by the auditor. If the client's program is operating effectively, it
should generate the same results determined by the auditor.
106. When companies use information technology (IT) extensively and
evidence is available only in electronic form, generalized audit software packages
generate the programs necessary to interrogate the files and extract and analyze
the data.
107. Reporting responsibilities under GAGAS are expanded to include:
a) Reports on compliance with laws, rules and regs, violations of which may
affect F/S amounts, and
b) Reports on I/C over financial reporting
108. Generally accepted government auditing standards primarily apply to
audits of federal financial assistance but have been adopted by some states for
audits of state financial assistance.
109. A single audit represents a combined audit of both an entity's F/S and
federal financial assistance programs.
110. OMB circular A-133 allows auditors to use a risk-based approach to
determine major grants.
111. Audit organizations seeking to enter into a contract to perform an audit in
accordance with government auditing standards should provide their most recent
external quality control review report to the party contracting for the audit.
112. When reporting under Government Auditing Standards, the auditor
should consider whether any noted deficiencies in such internal controls should
be reported to specific legislative and regulatory bodies.
113. Only material instances of fraud and illegal acts discovered need to be
communicated in the auditor's report on compliance. If applicable, the report
should state that other instances of noncompliance were communicated to mgm't
in separate letter.
114. For an entity that does not receive governmental financial assonance, an
auditor's standard report on financial statements generally would not refer to the
entity's internal control.
115. The report on the audit of the financial statements should describe the
scope of the auditor's testing compliance with laws and regulations and internal
control over financial reporting, and should either present the results of those
tests or refer to a separate report containing that information.
116. The report on the audit of F/S should describe the scope of the auditor's
testing of compliance with laws and regulations and internal control over
financial reporting, and present the results of those tests.
117. The auditor should communicate the initial selection of, and changes in,
significant accounting policies to those charged with governance.
118. The auditor is required to inform the audit committee about difficulties
encountered with management during the audit.
119. The auditor should determine that those charged with governance are
informed about the initial selection of and changes in significant accounting
policies or their application.
120. The auditor should ensure that those charged with governance are
informed about the process used by management in formulating particularly
sensitive accounting estimates and about the basis for the auditor's conclusions
regarding the reasonableness of the estimates.
121. The basis for assessing control risk, preliminary judgments about
materiality levels, and the justification for performing substantive procedures at
interim dates are matter of auditor's judgment that need not be shared with those
charged with governance.
122. Materiality limitation would not apply to those representations that are
not directly related to amounts included in the F/S, such as mgm't
acknowledgement of its responsibility for F/S, availability of financial records,
and completeness and availability of minutes. It does not apply to
management's involvement with fraud either.
123. Which of the following expressions most likely would be included in a
mgm't rep letter? No events have occurred subsequent to the B/S date that
require adjustment to, or disclosure in, the F/S
124. Management's rep letter included the following 4 categories: F/S,
completeness, recognition/measurement/ disclosure and subsequent events.
125. A review of interim F/S in not designed to provide info regarding an
entity's ability to continue as a going concern. The auditor is not required to
inquire lawyer's regarding litigations either.
126. If a report on a review of interim F/S is presented in a registration
statement, the prospectus should include a statement that the report is not a
"report" or "part" of the registration statement.
127. In a typical comfort letter, the accountants express an opinion (i.e.,
positive assurance) concerning the F/S's compliance (as to form) with the
pertinent accounting requirements of the SEC.
128. A compilation of a financial forecast would not include evaluation of the
support for the assumptions underlying the forecast.
129. The acct's report on a review of pro forma financial info should include a
reference to the F/S from which the historical info is derived and a statement as
to whether such financial statements were audited or reviewed.
130. A sufficient understanding of I/C is not required to be obtained in an
attestation engagement.
131. Compilation of F/S is not attestation. Compilation of prospective F/S is
attestation.
132. Attestation engagement specifically exclude advocacy services and
consulting services.
133.