Audit Video 1 of 3 (below) The first of three Audit Videos where I provide the AICPA Answer Explanations for Audit from the recently released questions. As of this printing, no other CPA Review Courses have this ready yet. Probably because they are very busy with their college teachings, their Continuing Professional education lecturing (CPE) and lets not forget CFA. The first question asks the candidate to compare and contrast compilations and reviews of non-issuers What they both have in common is that SSARS standards apply, an engagement letter is required and a report is required for both engagements. Other than that, there are many differences. A review includes inquiries and analytical procedures, compilations do not involve either of those procedures. Since no inquiries are made in a compilation, no management representation letter is needed in a compilation, unlike for a review. A review involves limited assurance provided by the CPA, no assurance is given in a compilation. The second question asks about a compilation and a candidate needs to know that a compilation is limited to presenting information in the form of financial statements that is the representation of management. Then I skipped to another compilation question about when a CPA would not accept a compilation engagement, and the answer had to do with management refusing to investigate illegal activity within the company because a CPA never wants to be associated with , management that lacks integrity, not just in an audit, but any engagement. The AICPA also asked a question about internal control and what would be considered an inherent limitation, collusion among employees is always considered an inherent limitation. Notice that collusion is considered an inherent limitation and not a weakness. Weaknesses can be corrected, inherent limitations are built in to any system of controls. Two individuals could always work together to steal from the company, and cover it up and the company would suffer losses and the independent auditor would have a difficult time detecting it, the higher up it goes. For example, if the treasurer were stealing cash, and the controller was covering up the theft in the accounting records, this would be collusion, an inherent limitation, not a material weakness. The next question asked what would increase the risk of fraudulent financial reporting and the auditor would look for year end adjustments that significantly affect financial results.
Audit Video #2 of 3 Below. This video begins with the AICPA Answer Explanations for Audit to a Question about quality control standards at the Audit firm. After two questions on quality control standards, then the exam asked about what audit procedures might be performed before the balance sheet date and the answer is that internal control can be assessed before the balance sheet but the other choices involved audit procedures performed in the subsequent period. Then, another multiple choice question on fraudulent financial reporting involving the fraud triangle and in particular, rationalization, the ability to rationalize fraud. The auditor would conclude that if an entity could ignore and disregard regulatory authorities then that same management could justify fraudulent financial reporting. Then a question is asked about fraud but the other fraud, misappropriation of assets. Three of the choices relate to fraudulent financial reporting but one choice, if fixed assets lack ownership identification, this could easily lead to theft. Note that in this question, the AICPA played one type of fraud against the other. The next question was about two directional testing, always on the Audit exam. The question asked about overstatement and where the test for overstatement would begin and it would start with the accounting records. A two directional test for overstatement of sales would begin with the accounting records, what was recorded as a sale in the sales journal and move to the event that is uncertain, the supporting documents, the shipping documents. Any recorded sales where no shipping documents are found would indicate overstatement of sales, phony sales, accounting fraud. The auditor presumes overstatement of sales in every audit and typically performs a test like this to gather evidence that sales are not overstated. The next question asked about the independent auditor’s assessment of the internal auditor’s objectivity. This is one of those trickery multiple choice questions. All the answer choices are correct regarding the internal auditor but only one answer describes objectivity of the internal auditor. The other choices involve the internal auditor’s competence. The independent auditor will assess both the internal auditor’s competence and objectivity but the question only asked about objectivity, thus the trickery. Then a planning question. Audit planning questions are always tricky because once again, the wrong answer appears right but its right for a slightly different question. All the choices are audit procedures but only one was a procedure performed in the planning stage. Then a sampling question was asked regarding stratification. Stratification is a technique done prior to sampling to give consideration to larger items and make them more likely to appear in the sample because an auditor would want to test larger items as they would contain larger potential misstatement. Then, another sampling question, pure definition on the difference between attribute and variable sampling. Then another sampling question on the auditor’s evaluation of the results of a sample. These sampling questions could have been pulled directly from the i-75 test bank. Then a question about receivable confirmations, why a blank confirmation is less likely to be returned by the customer. This is because it requires effort by the customer since no amount is listed. The customer may intend to do the research later, and then never get around to it. Then two questions on procedures performed in a review of a non-issuer, internal inquiry and analytical procedures, no internal control work in a review of a non-issuer.
Audit Video #3 of 3. The 3rd Video begins with my AICPA Answer Explanations for Audit regarding an auditor’s reaction to a client’s unusual request to NOT confirm a particular customer’s account receivable. The auditor would not need to disclaim an opinion because alternative audit procedures are possible including inspection of the cash receipts in the subsequent period and the client’s bank statement. Then, subsequent events, the audit exam always asks about subsequent events. Usually the auditor inquires about subsequent events but reading the minutes of the board meetings are a good source also as well as reading the latest interim financial statements and comparing them to the year under audit. The next question asks about when an auditor would not be allowed to issue a qualified opinion and the answer is when the auditor is not independent. This question appears to be pulled right out of my i-75 test bank! The next 2 questions are agreed upon procedures and agreed upon procedures questions always follow this pattern, CPA must be Independent, no assurance given, report is restricted. The next question asks about a compilation report when the financial statements carry fixed assets at fair value rather than historical cost. The wrong answer is that the CPA would add a paragraph that discloses the departure from GAAP and its effects on the financial statements. The next question is on a compilation engagement where the management will not revise the errors and the CPA believes that modification of the standard compilation report is not enough. In that case the CPA would likely withdraw. The final question is about a comfort letter and the assurance provided by a CPA in a typical letter to an underwriter. The CPA provides negative assurance on unaudited information requested by the underwriter.
Here are my AICPA Answer Explanations for Audit in the 3 videos above. The AICPA recently released 50 multiple choice questions and the correct letter answers but the AICPA did not release any written explanations as to why the right answer is right and the wrong answer is wrong. In Audit, these explanations take on a new meaning because often on the Audit exam, the wrong answer is right but right for a slightly different question. Watch these three Videos and take notes as you watch.