Wiley CPAexcel exam review 2016 focus notes auditing and attestation

2016

Wiley

CPAexcel

®

exam review
FOCUS NOTES



2016

Wiley

CPAexcel

®

exam review
FOCUS NOTES
Auditing and Attestation


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10 9 8 7 6 5 4 3 2 1


Contents
Prefacevii
About the Author
ix
About the Contributor
ix
Module 1:
Module 2:

Module 3:
Module 4:
Module 5:
Module 6:
Module 7:
Module 8:

Professional Responsibilities
Engagement Planning, Obtaining an Understanding, and Assessing Risks
Understanding Internal Control and Assessing Control Risk
Responding to Risk Assessment: Evidence Accumulation and Evaluation
Reporting
Accounting and Review Services
Audit Sampling
Auditing with Technology

Index

1
32
64
96
157
233
253
269
277

v

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

vii

•
•
•

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

Preface
viii


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 Ac­countants
(AICPA), and he previously was on the audit staff of KPMG. He previously served as a member of the Audit­ing Standards
Board of the AICPA and as a member of the Accounting and Review Services Committee and the Board of Re­gents of

the Institute of Internal Auditors. Professor Whittington has published numerous textbooks, articles, mono­graphs, 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.

ix



PROFESSIONAL RESPONSIBILITIES
Financial Statements, an Audit and Audited Financial
Statements
Audited
Financial
Statements
Financial
Statement

Prepared following a
Financial Reporting
Framework (e.g., GAAP)

CPA Audit
Audit

Report

Conducted following
Auditing Standards
(e.g., GAAS)

Focus on



Professional Responsibilities—Module 11


DIAGRAM OF AN AUDIT
Plan Audit

Obtain Understanding of
Client and Its Environment
Including Internal Control

Assess Risks of Misstatement
and Design Further Tests
Perform Tests
of Controls
Perform Substantive
Procedures

Complete the Audit

Issue Audit Report

Focus on



Professional Responsibilities—Module 12


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 13

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 depar­
ture, 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 14


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 15


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 16


Rules and Applicability
Public
Practice
X

Rules
Integrity and Objectivity

Business

Other

X

Independence

X

General Standards

X

X

Compliance with Standards

X

X

Accounting Principles

X

X

Acts Discreditable

X

X

Fees and Other Types of Remuneration
•  Contingent Fees
•  Commissions and Referral Fees

X
X

Advertising and Other Forms of Solicitation

X

Confidential Client Information

X

Form of Organization and Name

X

X

Focus on



Professional Responsibilities—Module 17

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 con­
ceptual 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 18


Threats and Safeguards Considered by Conceptual Frameworks
Threats

Safeguards

•  Adverse interest

•  Created by the profession, legislation or regulation

•  Advocacy

•  Implemented by the client

•  Familiarity

•  Implemented by the CPA firm

•  Management participation
•  Self-interest
•  Self-review
•  Undue influence

Focus on



Professional Responsibilities—Module 19


General Conceptual Framework Code of Professional Conduct Approach
Relationship or
circumstance that
potentially affects
compliance with Code

Does Code directly address?
Yes

No

Does the relationship or
circumstance create one or more
threats to compliance with Code?

No

May provide service

No

Do not provide professional
service

Yes

Follow Code requirements

Do qualitative and quantitative
factors, including existing
safeguards, reduce the risk of noncompliance with the Code to an
acceptable level?
Yes
May provide service

Focus on



Professional Responsibilities—Module 110


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 part­
ner 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 111


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 pro­
vide attest services to that client.

Focus on



Professional Responsibilities—Module 112


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 113


Additional Independence Requirements for Covered
Members—Family
Interests of relatives and friends
(1)Immediate family (spouse, spousal equivalent, dependents)—same requirements as cov­

ered member, with limited exceptions.
(2)Close relatives (e.g., parents, siblings, or nondependent children)—overall, CPA firm inde­
pendence is impaired if close relative has (a) a key position with the client, or (b) Is mate­
rial 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 114