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6FOCUS NOTES
CPAexcel®
ExAm rEviEw
wiley
201
6
AUdiTiNg ANd ATTESTATiON
FOCUS NOTES
CPAexcel®
ExAm rEviEw
wiley
Cover Design: WileyCover image: © turtleteeth/iStockphoto
Copyright © 2016 by John Wiley & Sons, Inc. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada.
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Contents
Preface viiAbout the Author ixAbout the Contributor ix
Module 1: Professional Responsibilities 1Module 2: Engagement Planning, Obtaining an Understanding, and Assessing Risks 32Module 3: Understanding Internal Control and Assessing Control Risk 64Module 4: Responding to Risk Assessment: Evidence Accumulation and Evaluation 96Module 5: Reporting 157Module 6: Accounting and Review Services 233Module 7: Audit Sampling 253Module 8: Auditing with Technology 269
Index 277
vii
Preface
This publication is a comprehensive, yet simplified study program. It provides a review of all the basic skills and concepts tested on the CPA exam and teaches important strategies to take the exam faster and more accurately. This tool allows you to take control of the CPA exam.
This simplified and focused approach to studying for the CPA exam can be used:
• As a handy and convenient reference manual
• To solve exam questions
• To reinforce material being studied
Included is all of the information necessary to obtain a passing score on the CPA exam in a concise and easy-to-use format. Due to the wide variety of information covered on the exam, a number of techniques are included:
• Acronyms and mnemonics to help candidates learn and remember a variety of rules and checklists
• Formulas and equations that simplify complex calculations required on the exam
• Simplified outlines of key concepts without the details that encumber or distract from learning the essential elements
Preface viii
• Techniques that can be applied to problem solving or essay writing, such as preparing a multiple-step income statement, determining who will prevail in a legal conflict, or developing an audit program
• Pro forma statements, reports, and schedules that make it easy to prepare these items by simply filling in the blanks
• Proven techniques to help you become a smarter, sharper, and more accurate test taker
This publication may also be useful to university students enrolled in Intermediate, Advanced and Cost Accounting; Auditing, Business Law, and Federal Income Tax classes; or Economics and Finance Classes.
Good luck on the exam,
Ray Whittington, PhD, CPA
ix
About the Author
Ray Whittington, PhD, CPA, CMA, CIA, is the dean of the Driehaus College of Business at DePaul University. Prior to joining the faculty at DePaul, Professor Whittington was the Director of Accountancy at San Diego State University. From 1989 through 1991, he was the Director of Auditing Research for the American Institute of Certified Public Ac countants (AICPA), and he previously was on the audit staff of KPMG. He previously served as a member of the Audit ing Standards Board of the AICPA and as a member of the Accounting and Review Services Committee and the Board of Re gents of the Institute of Internal Auditors. Professor Whittington has published numerous textbooks, articles, mono graphs, and continuing education courses.
About the Contributor
Kurt Pany, PhD, CPA, is a Professor of Accounting at Arizona State University. His basic and advanced auditing courses provided the basis on which he received the Arizona Society of CPA’s Excellence in Teaching Award and an Arizona CPA Foundation Award for Innovation in the Classroom for the integration of computer and professional ethics applications. His professional experience includes serving for four years on the AICPA’s Auditing Standards Board, serving as an academic fellow in the Auditing Division of the AICPA, and prior to entering academe, working as a staff auditor for Deloitte and Touche.
Focus on
Professional Responsibilities—Module 1 1
PROFESSIONAL RESPONSIBILITIES
Financial Statements, an Audit and Audited Financial Statements
FinancialStatement
CPA Audit
AuditedFinancialStatements
AuditReport
Prepared following aFinancial ReportingFramework (e.g., GAAP)
Conducted followingAuditing Standards(e.g., GAAS)
Focus on
Professional Responsibilities—Module 1 2
DIAGRAM OF AN AUDIT
Plan Audit
Obtain Understanding ofClient and Its EnvironmentIncluding Internal Control
Assess Risks of Misstatementand Design Further Tests
Perform SubstantiveProcedures
Complete the Audit
Issue Audit Report
Perform Testsof Controls
Focus on
Professional Responsibilities—Module 1 3
Principles Underlying an Audit
• Purpose of audit—Provide an opinion.• Premise of audit—Management has responsibility for preparing financial statements and
providing auditor with all needed information.• Personal responsibilities of auditor—Competence, follow ethical requirements, main
tain professional skepticism.• Auditor actions in audit—Provide procedures to obtain reasonable assurance about
whether financial statements are free from material misstatements.• Reporting results of an audit—Written report with an opinion, or a statement that an
opinion cannot be obtained.
Focus on
Professional Responsibilities—Module 1 4
Auditing Standard Requirement Categories
• Unconditional requirement—The auditor must comply with the requirement in all cases in which the circumstances exist. SAS use the words must or is required to indicate an unconditional requirement.
• Presumptively mandatory requirement—Similarly, the auditor must comply with the requirement, but, in rare circumstances, the auditor may depart from such a requirement. In such circumstances, the auditor documents the departure, the justification for the departure, and how the alternative procedures performed in the circumstances were sufficient. SAS use the word should to indicate a presumptively mandatory requirement.
Note: The PCAOB includes a third level, Responsibility to Consider, in which the auditor follows, depends upon the exercise of professional judgment in the circumstances. Terms such as may, might, or could, indicate a responsibility to consider.
Focus on
Professional Responsibilities—Module 1 5
Code of Professional Conduct
Sections
• Preface, applicable to all members• Part 1: applicable to members in public practice• Part 2: applicable to members in business• Part 3: applicable to other members (retired and unemployed)
Structure
• Principles (6 general statements)• Rules of conduct (11 overall standards)• Interpretations of the rules• Other guidance (e.g., definitions, pending revisions)
Focus on
Professional Responsibilities—Module 1 6
Code of Professional Conduct (continued)
Principles
1. Responsibilities 2. Public Interest 3. Integrity 4. Objectivity and Independence 5. Due Care 6. Scope and Nature of Services
Focus on
Professional Responsibilities—Module 1 7
Rules and Applicability
RulesPublic
PracticeBusiness Other
Integrity and Objectivity X X
Independence X
General Standards X X
Compliance with Standards X X
Accounting Principles X X
Acts Discreditable X X X
Fees and Other Types of Remuneration• ContingentFees• CommissionsandReferralFees
XX
Advertising and Other Forms of Solicitation X
Confidential Client Information X
Form of Organization and Name X
Focus on
Professional Responsibilities—Module 1 8
Conceptual Frameworks
Code includes three conceptual frameworks for situations not explicitly addressed by a Rule.
1. Members in public practice—1 independence conceptual framework and 1 general conceptual framework to address issues other than independence.
2. Members in business—a general conceptual framework. 3. All frameworks use an approach of considering seriousness of threats and whether safe
guards reduce the risk to an acceptable level.
Focus on
Professional Responsibilities—Module 1 9
Threats and Safeguards Considered by Conceptual Frameworks
Threats Safeguards
• Adverseinterest • Createdbytheprofession,legislationorregulation
• Advocacy • Implementedbytheclient
• Familiarity • ImplementedbytheCPAfirm
• Managementparticipation
• Self-interest
• Self-review
• Undueinfluence
Focus on
Professional Responsibilities—Module 1 10
Relationship orcircumstance thatpotentially affects
compliance with Code
Does Code directly address?Does the relationship or
circumstance create one or morethreats to compliance with Code?
May provide service
Yes
Follow Code requirements
Do qualitative and quantitativefactors, including existing
safeguards, reduce the risk of non-compliance with the Code to an
acceptable level?
Do not provide professionalservice
May provide service
No
No
No
Yes
Yes
General Conceptual Framework Code of Professional Conduct Approach
Focus on
Professional Responsibilities—Module 1 11
Independence Rule
• Only applies to members in public practice and their attest clients• The concept of a covered member is important because, in general, covered members
must be independent for the firm to retain its independence: Covered members include:• Members of attest engagement team
• Person who may influence attest engagement (e.g., partner who supervisor the partner in charge of the engagement)
• All partners in the office in which the lead attest partner practices
• Certain partners or managers who perform nonattest services to the client
• The firm, including its benefit plans
Focus on
Professional Responsibilities—Module 1 12
Independence Requirements for all Partners and Staff
1. No partner or professional employee (or their immediate family members) or group acting together may own more than 5% of attest client’s equity securities.
2. No partner or professional employee may be director, officer, employee etc. of the client. 3. CPAs previously employed by a client, but now employed by CPA firm, must not be involved
with the audit of any period during which they were employed by that client.
If any of the above situations occur, the CPA firm’s independence is impaired and it may not provide attest services to that client.
Focus on
Professional Responsibilities—Module 1 13
Additional Independence Requirements for Covered Members—Financial
Financial relationships that impair the independence of both the member and the firm include:
(1) All direct financial interests (e.g., stock or debt investment in attest client) (2) Material indirect financial interests (e.g., investment in a mutual fund heavily invested in the
attest client) (3) A material joint closely held investment held with an attest client (or one of the client’s offi
cers or directors, or any owner with significant influence over the attest client)
Focus on
Professional Responsibilities—Module 1 14
Additional Independence Requirements for Covered Members—Family
Interests of relatives and friends
(1) Immediate family (spouse, spousal equivalent, dependents)—same requirements as covered member, with limited exceptions.
(2) Close relatives (e.g., parents, siblings, or nondependent children)—overall, CPA firm independence is impaired if close relative has (a) a key position with the client, or (b) Is material to the close relative of which the accountant has knowledge.
(3) Other considerations for all relatives and friends. Independence is only impaired unless a reasonable person aware of the facts would conclude there is an unacceptable risk.
Focus on
Professional Responsibilities—Module 1 15
Examples of Activities that Impair Independence
• Supervising client’s personnel• Signing client’s checks• Acting as client’s stock transfer agent• Accepting gifts from client
Focus on
Professional Responsibilities—Module 1 16
Independence—Unpaid Fees
• Unpaidfeesmayimpairindependence• May not extend beyond one year
• Audit may be performed, but report may not be issued until prior year fees paid
Focus on
Professional Responsibilities—Module 1 17
Independence—Auditor on Engagement Considers or Takes Employment with Audit Client
• Individual must inform the audit firm when seeking or discussing potential employment with client.
• Individual’s independence impaired (should be taken off job) until employment by client is no longer being considered by that individual.
• Once individual accepts employment with audit client, the audit firm should consider the need to mod ify the audit plan or change members of the audit.
• In any audit performed within a year of the professional joining the client, a member of the audit firm with no connection to the audit must review all work to ensure it takes into account independence issues.
Focus on
Professional Responsibilities—Module 1 18
Independence—Nonattest Services
• May provide advice, research materials, and recommendations• Client must accept responsibility for making all decisions• Specific client personnel must be designated to oversee services• Client must be responsible for establishing and maintaining all internal controls and may
not “outsource” such services to the auditor• An understanding of the objectives of the engagement and client responsibilities must be
documented prior to performing the nonattest services for an attest client
A member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
• Misrepresentation of facts: Member is forbidden to knowingly (or let someone else)• Make materially false and misleading entries
• Fail to correct financial statements or records that are materially false and misleading
• Sign a document containing materially false and misleading information
