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CPA EXAM REVIEW

AUDITING

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V 3.3
Table of Contents Auditing

auditing
Table of Contents

Program Attendance Record................................................................................................................................................. xi

Introduction........................................................................................................................................................... Intro-1

AUDITING 1: Audit Reports

1. Professional Standards......................................................................................................................................A1-3
2. Audit Engagements............................................................................................................................................A1-7
3. Forming an Audit Opinion.............................................................................................................................. A1-13
4. Unmodified (Unqualified) Opinion................................................................................................................ A1-17
5. Modified Opinions Due to Financial Statement Issues............................................................................... A1-27
6. Modified Opinions Due to Audit Issues........................................................................................................ A1-37
 mphasis-of-Matter, Other-Matter, and Explanatory Paragraphs............................................................ A1-49
7. E
8. Reporting With Different Opinions and Other Auditors............................................................................. A1-57
9. Reporting on a Single Statement................................................................................................................... A1-71
10. Subsequent Events.......................................................................................................................................... A1-75
11. Other Information and Supplementary Information.................................................................................. A1-81
12. Special Purpose and Other Country Frameworks....................................................................................... A1-89

AUDITING 2: Quality Control, Engagement Acceptance, Planning, and Internal Control

1. Quality Control....................................................................................................................................................A2-3
2. Documentation................................................................................................................................................ A2-13
3. Terms of Engagement..................................................................................................................................... A2-17
4. Planning............................................................................................................................................................ A2-25
5. Using the Work of Others............................................................................................................................... A2-35
6. Materiality......................................................................................................................................................... A2-39
7. Risk Assessment: Part 1.................................................................................................................................. A2-43
8. Risk Assessment: Part 2.................................................................................................................................. A2-51
9. The Effect of Information Technology on the Audit.................................................................................... A2-67

AUDITING 3: Risk, Evidence, and Sampling

1. Fraud Risk............................................................................................................................................................A3-3
2. Audit Risk.......................................................................................................................................................... A3-11
3. Identifying, Assessing, and Responding to Risk........................................................................................... A3-17
4. Specific Areas of Engagement Risk................................................................................................................ A3-29
5. Sufficient Appropriate Evidence.................................................................................................................... A3-39
6. Procedures to Obtain Evidence..................................................................................................................... A3-45
7. Financial Ratios................................................................................................................................................ A3-59
8. Sampling: Part 1............................................................................................................................................... A3-67
9. Sampling: Part 2............................................................................................................................................... A3-83

© Becker Professional Education Corporation. All rights reserved. xiii

Auditing Table of Contents

AUDITING 4: Performing Further Procedures, Forming Conclusions, and Communications

1. Revenue Cycle.....................................................................................................................................................A4-3
2. Expenditure Cycle............................................................................................................................................ A4-11
3. Cash Cycle......................................................................................................................................................... A4-17
4. Inventory Cycle................................................................................................................................................ A4-21
5. Investment Cycle............................................................................................................................................. A4-25
6. Other Transaction Cycles................................................................................................................................ A4-33
7. Matters That Require Special Consideration............................................................................................... A4-43
8. Misstatements and Internal Control Deficiencies....................................................................................... A4-55
9. Written Representations................................................................................................................................. A4-65
10. Communication With Management and Those Charged With Governance............................................ A4-71
11. Other Communications.................................................................................................................................. A4-85
12. Appendix: Control Procedures and Tests of Control.................................................................................. A4-89

AUDITING 5: Integrated Audits, Attestation Engagements, Compliance, and Government Audits

1. Integrated Audit Procedures.............................................................................................................................A5-3
2. Communication and Reporting in an Integrated Audit.............................................................................. A5-13
3. Attestation Engagements and Standards..................................................................................................... A5-29
4. Agreed-Upon Procedures and Prospective Financial Statements............................................................. A5-39
5. Reporting on Controls at a Service Organization........................................................................................ A5-53
6. Reporting on Compliance............................................................................................................................... A5-61
7. Government Audits......................................................................................................................................... A5-73
8. Single Audits..................................................................................................................................................... A5-83

AUDITING 6: A
 ccounting and Review Service Engagements, Interim Reviews, and Ethics
and Professional Responsibilities
1. SSARS Engagements...........................................................................................................................................A6-3
2. Preparation Engagements.................................................................................................................................A6-9
3. Compilation Engagements............................................................................................................................. A6-15
4. Review Engagements...................................................................................................................................... A6-27
5. Review Reports................................................................................................................................................ A6-41
6. Interim Reviews............................................................................................................................................... A6-51
7. Letters for Underwriters................................................................................................................................. A6-63
8. The AICPA Code of Professional Conduct..................................................................................................... A6-69
9. Ethical Requirements of the SEC and PCAOB.............................................................................................. A6-85
10. Ethical Requirements of the GAO and DOL.................................................................................................. A6-93

Class Question Explanations.................................................................................................................................. CQ-1

Blueprint.................................................................................................................................................................... BL-1
Glossary.................................................................................................................................................................... GL-1
Index.......................................................................................................................................................................Index-1

xiv © Becker Professional Education Corporation. All rights reserved.

 AUD

1
Audit Reports

Module

1 Professional Standards....................................................................3
2 Audit Engagements..........................................................................7
3 Forming an Audit Opinion.............................................................13
4 Unmodified (Unqualified) Opinion...............................................17
5 Modified Opinions Due to Financial Statement Issues..............27
6 Modified Opinions Due to Audit Issues.......................................37
7 Emphasis-of-Matter, Other-Matter,
and Explanatory Paragraphs........................................................49

8 Reporting With Different Opinions and Other Auditors............57

9 Reporting on a Single Statement..................................................71

10 Subsequent Events........................................................................75

11 Other Information and Supplementary Information.................81

12 Special Purpose and Other Country Frameworks......................89

 1
AUD 1 1 Professional Standards
Module
Professional Standards
AUD 1

1 Professional Standards

The Auditing and Attestation section tests audits of issuers, nonissuers, governmental entities,
not‑for‑profit entities, and employee benefit plans. In addition to audits, this section also
tests other types of engagements that an accountant may be called upon to perform, such as
accounting and review service engagements and attestation and assurance engagements. Each
engagement requires the accountant to follow the applicable ethical guideline(s) and standard(s)
for the engagement. For example, an audit engagement requires the auditor to perform the
audit in accordance with generally accepted auditing standards (GAAS). These engagements and
applicable standards will be covered in more detail in later modules.
Below is an overview of standards and guidelines that will be tested in this section:

Professional Standards and Guidelines

Standard/ Section Standard-
Guideline Reference Setting Body Description Applies to:
Audits
Statements AU-C AICPA SAS provide generally yyAudits of annual
on Auditing Auditing accepted auditing historical financial
Standards Standards standards for the audits of statements: nonissuers
(SAS) Board nonissuers. In addition,
SAS provide guidance for
yySpecial reports:
nonissuers
other services, such as
review of interim financial yyInterim financial
information and letters to statements (where
underwriters. the annual financial
statements have been
audited): nonissuers

Public PCAOB AS Public PCAOB AS provide yyAudits of annual

Company Company generally accepted auditing historical financial
Accounting Accounting standards for the audits of statements: issuers
Oversight Oversight issuers. In addition, PCAOB
Board Board AS provide guidance for
yySpecial reports: issuers
Auditing other services, such as yyInterim financial
Standards review of interim financial statements: issuers
(PCAOB AS) information and letters to
underwriters.

Generally GAGAS Governmental GAGAS provide guidance Financial or performance

Accepted Accountability for audits of government audits of government
Government Office organizations, programs, organizations, programs,
Auditing activities, and of entities activities, and of
Standards that receive government entities that receive
(GAGAS) funds. government funds.

© Becker Professional Education Corporation. All rights reserved. Module 1 A1–3

1 Professional Standards AUD 1

Standard/ Section Standard-

Guideline Reference Setting Body Description Applies to:
Other Engagements
Statements AT-C AICPA SSAE provide guidance Examination, a review, or
on Standards for attestation agreed-upon procedures
for Attestation engagements. report on a subject matter,
Engagements or an assertion about
(SSAE) a subject matter, that
is the responsibility of
another party.

Statements AR-C AICPA SSARS provide guidance yyPreparation,

on Standards Accounting for unaudited financial compilation, and reviews
for Accounting and Review statements or unaudited of historical financial
and Review Services financial information of statements: nonissuers
Services Committee nonissuers.
(SSARS)
yyPreparation or
compilation of pro
forma financial
information: nonissuers

Guidelines
Code of ET AICPA The AICPA Code of Members of the AICPA
Professional Professional Conduct
Conduct provides members with
guidelines for behavior
in the conduct of their
professional affairs. In
addition, it provides
assurance to the public
that the profession
intends to maintain
high standards and to
enforce compliance
with these standards by
its members.

Statements on QC AICPA SQCS provides guidance CPA firms providing

Quality Control to CPA firms about a auditing, attestation, and
Standards quality control system. accounting and review
(SQCS) A quality control system services.
consists of policies and
procedures designed,
implemented, and
maintained to ensure
that the firm complies
with professional
standards and
appropriate legal and
regulatory requirements,
and that any reports
issued are appropriate in
the circumstances.

A1–4 Module 1 © Becker Professional Education Corporation.Professional Standards

All rights reserved.
AUD 1 1 Professional Standards

2 Auditing Guidance: The GAAS Hierarchy

There are three levels of audit guidance:

1. SAS (Nonissuers) and PCAOB AS (Issuers)

The auditor should:
yyUse professional judgment in applying the SAS or PCAOB AS to a particular
engagement.
yyBe prepared to justify any departures from presumptively mandatory
requirements.

Most Specific language is used within the standards to clarify the auditor's level of
Authoritative responsibility:
yy"Must" or "is required" indicates an unconditional requirement, which
must be followed in all cases in which the requirement is relevant.
yy"Should" indicates a presumptively mandatory requirement, which must
be followed in all cases in which the requirement is relevant, except in
rare circumstances when departure from the requirement is permitted
if there is appropriate justification, performance of sufficient alternative
procedures, and thorough documentation.
yy"May," "might," and "could" indicate explanatory material that does not
impose a professional requirement for performance.
2. Interpretive Publications
Interpretive publications are recommendations regarding how SASs should be
applied in specific situations. They are not considered to be auditing standards.
The auditor should:
yyConsider the guidance provided by these publications in performing an audit.
yyBe able to explain any departures, and how compliance with standards was
otherwise achieved.
Examples include: Auditing interpretations of GAAS, exhibits to GAAS, auditing
guidance provide in AICPA Audit and Accounting Guides, and AICPA Auditing
Statements of Position (SOP).
3. Other Auditing Publications
Other auditing publications have no authoritative status but may be helpful to
Least the auditor.
Authoritative
The auditor should:
yyConsider the guidance provided by these publications in performing an audit.
yyBe able to explain any departures, and how compliance with standards was
otherwise achieved.
Examples include: Auditing articles in the Journal of Accountancy (or other
professional journal), auditing articles in the AICPA CPA Letter, continuing
professional education materials, textbooks, and other auditing publications.

© Becker Professional Education Corporation. All rights reserved. Module 1 A1–5

1 Professional Standards AUD 1

Question 1 CPA-02298

Which of the following provides the most authoritative guidance for the auditor of
a nonissuer?
a. An AICPA audit and accounting guide that provides specific guidance with respect
to the accounting practices in the client's industry.
b. A Journal of Accountancy article discussing implementation of a new standard.
c. General guidance provided by a Statement on Auditing Standards.
d. Specific guidance provided by an interpretation of a Statement on Auditing
Standards.

A1–6 Module 1 © Becker Professional Education Corporation.Professional Standards

All rights reserved.
 2
AUD 1 2 Audit Engagements
Module
Audit Engagements
AUD 1

1 Audit Process Overview

u dit Pro
A c
e

es
Th

General Principles

s
Overall objectives
Documentation
Communication
Quality control—firm

Engagement Acceptance
Ethics and independence
Terms of engagement

Assess Risk and Plan Response

Audit planning, including audit strategy
Materiality
Risk assessment procedures:
• Understand the entity and its environment
• Understand internal control
Identify and assess risk
Respond to risk

Perform Procedures and Obtain Evidence

Test of controls, if applicable
Substantive testing

Form Conclusions
Subsequent events
Management representation
Evaluate audit results
Quality control—engagement

Reporting
Report on audited financial statements
Other reporting considerations

© Becker Professional Education Corporation. All rights reserved. Module 2 A1–7