1.

(TCO B) According to the standards of the profession, which of the following activities would
most likely not impair a CPA's independence? (Points:5)
Number 2
Signing a client's checks in emergency situations.
Providing extensive advisory services for a client.
Accepting a luxurious gift from a client.
Contracting with a client to supervise the client's office personnel.

Question2.2.(TCO K) An auditor should consider which of the following when evaluating the ability of a
company to continue as a going concern? (Points:5)
A lawsuit for which judgment is not anticipated for 18 months.
Management's plans for disposal of assets.
Future assurance services.
Audit fees.

Question3.3.(TCO A) According to the ethical standards of the profession, which of the following acts is
generally prohibited? (Points:5)
Issuing a modified report explaining a failure to follow a governmental regulatory agency's
standards when conducting an attest service for a client.
Accepting a contingent fee for representing a client in an examination of the client's federal tax
return by an IRS agent.
Retaining client records after an engagement is terminated prior to completion and the client has
demanded their return.
Revealing confidential client information during a quality review of a professional practice by a
team from the state CPA society.

Question4.4.(TCO H) Which of the following best describes the responsibility of the auditor with respect
to significant deficiencies and material weaknesses in an audit of an issuer? (Points:5)

Number4
Must be Communicated to Management and Results in an Adverse Opinion of the
the Audit Committee Effectiveness of Internal Control
Material weaknesses but not Material weaknesses but not
significant deficiencies significant deficiencies

Must be Communicated to Management and Results in an Adverse Opinion of the

the Audit Committee Effectiveness of Internal Control
 Both significant deficiencies and Both significant deficiencies and
material weaknesses material weaknesses

Must be Communicated to Management and Results in an Adverse Opinion of the
the Audit Committee Effectiveness of Internal Control
Material weaknesses but not Both significant deficiencies and
significant deficiencies material weaknesses

Must be Communicated to Management Results in an Adverse Opinion of the
and the Audit Committee Effectiveness of Internal Control
Both significant deficiencies and Material weaknesses but not
material weaknesses significant deficiencies

Question5.5.(TCO E) Which of the following is the best way to compensate for the lack of adequate
segregation of duties in a small organization? (Points:5)
Replacing personnel every three or four years.
Allowing for greater management oversight of incompatible activities.
Disclosing lack of segregation of duties to the external auditors during the annual review.
Requiring accountants to pass a yearly background check.

1. (TCO A) You have been hired by a Regional CPA firm to perform audits on their
largest clients. Explain what Standards of Field work you would be required to
adhere to and why.

a. Knowledge of client business: - First and foremost task will be to gather

information of all the clients of the CPA firm. This will make easier to analyse and make
up the mind the areas to be covered during audit.
b. Objectivity: - Auditor must try to maintain the integrity of profession and he
must be objective towards its goal.
C: evidence: - Auditor must gather proper and adequate evidence to support his
conclusions drawn from audit.
 2. (TCO C) Kent, CPA is a staff auditor participating in the audit engagement of
Fort, Inc. Based upon each of the circumstances below, indicate whether or not
Kents actions impair his independence. Explain your response for each
situation:

Kents friend, an employee of another local accounting firm,

prepares Forts Tax return.
Kents sibling is the director of Internal Auditing for Fort, Inc

1. Kents friend, an employee of another local accounting firm, prepares Forts Tax return.

In this case Kents action will not impair his independence because the relationship of friend

is not considered in the disqualification of auditor.

2. Kents sibling is the director of Internal Auditing for Fort, Inc..

In this case Kents action will impair his independence because the sibling of Kent is the director

of the Internal Auditing for Fort, Inc. Disqualification of Auditor states that the person whose

relative is at the director level is not eligible accept the audit engagement because in this case the

independence of the audit work can be hampered.

Accepting a football gift may impair the independence as this gift may influence the
decision of kent as the gift offered has more worth.
Ownership of the stock in which Fort also plans to invest is not a big deal unless either
of the two namely auditor or client is owner of the same. Therefore this will not affect
impairment

3. Sarbanes Oxley requires that per Section 404 that Internal Controls within a
publicly held company are to be reviewed, evaluated and tested at year end to
insure that adequate controls are in place. Explain and describe the three major
methods to obtain and document their understanding of a companys controls.

Auditing standards require auditors to obtain and document their understanding

of internal control for every audit. This understanding is necessary for both the audit
of internal controls over financial reporting and the audit of financial statements.
Managements documentation is a major source of information in gaining the
understanding.
As part of the auditors risk assessment procedures, the auditor uses procedures
to obtain an understanding, which involve gathering evidence about the design
of internal controls and whether they have been implemented, and then uses that
information as a basis for assessing control risk and for the integrated audit. The
auditor generally uses four of the eight types of evidence described in Chapter 7 to
obtain an understanding of the design and implementation of controls: inspection,
inquiry of entity personnel, and observation of employees performing control
processes, and reperformance by tracing one or a few transactions through the
accounting system from start to finish. Auditors commonly use three types of
documents to obtain and document their understanding of the design of internal
control: narratives, flowcharts, and internal control questionnaires. Because Section
404 requires management to assess and document the design effectiveness of
internal control over financial reporting, they have usually already prepared this
documentation. Narratives, flowcharts, and internal control questionnaires, used by
the auditor separately or in combination to document internal control, are discussed
next.
Narrative A narrative is a written description of a clients internal controls. A
proper narrative of an accounting system and related controls describes four things:
1. The origin of every document and record in the system. For example, the
description should state where customer orders come from and how sales invoices
are generated.
2. All processing that takes place. For example, if sales amounts are determined by
a computer program that multiplies quantities shipped by standard prices contained
in price master files, that process should be described.
3. The disposition of every document and record in the system. The filing of
documents, sending them to customers, or destroying them should be described.
4. An indication of the controls relevant to the assessment of control risk. These
typically include separation of duties (such as separating recording cash from
handling cash), authorizations and approvals (such as credit approvals), and internal
verification (such as comparison of unit selling prices to sales contracts).
Flowchart An internal control flowchart is a diagram of the clients documents
and their sequential flow in the organization. An adequate flowchart includes the
same four characteristics identified for narratives. Well prepared flowcharts are
advantageous primarily because they provide a concise overview of the clients
system, including separation of duties, which helps auditors identify controls and
deficiencies in the clients system. Flowcharts have two advantages over narratives:
typically they are easier to read and easier to update. It is unusual to use both a
narrative and a flowchart to describe the same system because both present the
same information.
Internal Control Questionnaire An internal control questionnaire asks a
series of questions about the controls in each audit area as a means of identifying
internal control deficiencies. Most questionnaires require a yes or a no response,
with no responses indicating potential internal control deficiencies. By using a
questionnaire, auditors cover each audit area reasonably quickly. The two main
disadvantages of questionnaires are their inability to provide an overview of the
system and their inapplicability for some audits, especially smaller ones.
Figure 10-4 illustrates part of an internal control questionnaire for the sales and
collection cycle of Hillsburg Hardware Co. Notice how the questionnaire incorporates
the six transaction-related audit objectives A through F as each applies to sales
transactions (see shaded portions). The same is true for all other audit areas.

4. (TCO K) For which of the following matters should an auditor obtain written
management representations? Select one of the below situations and explain
your response.
(a) Managements cost-benefit justifications for correcting internal control
weaknesses.
(b) Managements knowledge of future plans that may affect the price of the
entitys stock.
(c) Managements knowledge of allegations of fraud or suspected fraud
affecting the entity.
(d) Managements acknowledgment of its responsibilities for employees
violations of laws.

Auditor should obtain written management representations from management of the (c)
Managements knowledge of allegations of fraud or suspected fraud affecting
the entity.

As per AU 333 on Management representations In connection with an audit of financial statements

presented in accordance with generally accepted accounting principles, specific representations
should relate to the following matters:

(1) Financial Matters

(2) Completeness of Information

(3) Recognition, Measurement and Disclosure

(4) Information concerning subsequent events

Recognition, Measurement and Disclosure includes:

Managements Knowledge of any allegations of fraud or suspected fraud affecting the

entity received in communications from employees, former employees, analysts,
regulators, short sellers, or others.

and also

Knowledge of fraud or suspected fraud affecting the entity involving (1) management, (2) employees
who have significant roles in internal control, or (3) others where the fraud could have a material
effect on the financial statements
 5. Question 1. (TCO A) In performing an ATTEST Engagement A CPA would be required to do
what as part of the engagement? (Points : 19)

a. Services performed in accordance with Statements on Auditing Standards

(SASs)

b. Services performed in accordance with Statements on Standards for

Accounting and Review Services (SSARSs)

c. Services performed in accordance with the Statement on Standards for

Consulting Services (SSCS), such as engagements in which the practitioner's
role is solely to assist the client (for example, acting as the company
accountant in preparing information other than financial statements), or
engagements in which a practitioner is engaged to testify as an expert
witness in accounting, auditing, taxation, or other matters, given certain
stipulated facts.

d. Engagements in which the practitioner is engaged to advocate a client's

positionfor example, tax matters being reviewed by the Internal Revenue
Service

e. Tax engagements in which a practitioner is engaged to prepare tax

returns or provide tax advice

6. Question 1. (TCO E) What is COSO? Describe the 5 elements of COSOs Internal

Control-Integrated Framework. Provide an example of each of those components and
explain why they are important in providing Reliable Financial Reporting for a
company. Please provide a complete answer for full points. (Points : 30)

The Committee of Sponsoring Organizations of the Treadway Commission

(COSO) is a joint initiative of five private sector organizations, established in
the United States, dedicated to providing thought leadership to executive
management and governance entities on critical aspects of organizational
governance, business ethics, internal control, enterprise risk management,
fraud, and financial reporting.

Five Elements of COSOs Internal Control-Integrated Framework are:

- Control Environment: relates to the control consciousness of the people

within the organization. The control environment is the basis for all other
components of internal control. The reason why it is important in providing
Reliable Financial Reporting for a company is because it related to the
control consciousness of the people.
Control environment factors include the integrity, ethical values etc.

- Risk assessment: refers to the organization's identification, analysis,

and management of the risks that are related to financial statement
preparation, in order to ensure that financial statements are presented fairly
and in compliance with generally accepted accounting principles (GAAP). The
reason why it is important in providing Reliable Financial Reporting for a
company is it deals with the identification and analyzing of risks because
Risk assessment factors include auditors risk assessment and client
managements risk assessment.

- Control activities: the organization's policies and procedures which help

ensure that necessary actions are taken to address the potential risks
involved in accomplishing the entity's objectives. The reason why it is
important in providing Reliable Financial Reporting for a company is
because it helps in addressing that the steps are taken in regard to potential
risks. Control activities factors include adequate segregation of duties,
proper authorization of transactions and activities.

- Information and communication: focuses "on the nature and quality of

information needed for effective control, the systems used to develop such
information, and reports necessary to communicate it effectively" (Internal
Control Issues). The reason why it is important in providing Reliable
Financial Reporting for a company is because its focus is on the quality and
nature of the financial information.

Information and communication factors include a simple computerized

accounting system, active involvement by the owner.

- Monitoring: involves assessing the quality and effectiveness of the

organizations internal control process over time. It includes assessing the
design and operation of controls, and assessing compliance with policies and
procedures. It also provides for the implementation of appropriate actions
when necessary. The reason why it is important in providing Reliable
Financial Reporting for a company is because it deals with the effectiveness
of the organization.

Monitoring factors includes internal audit department, internal audit

independence
 7. Question 2.2. (TCO B) Below is an audit report please explain what is
wrong with this report. Note: There are at least 17 deficiencies
please give at least 5 of those deficiencies:

An audit report prepared by Henry and George, CPAs, is provided

below. The audit for the year ended December 31, 2010 was
completed on March 1, 2011, and the report was issued to Nelson
Corporation, a publicly held company, on March 13, 2011. List any
deficiencies in this report. Do not rewrite the report.

We have examined the accompanying financial statements of Novak

Corporation as of December 31, 2010. These financial statements are
the responsibility of the company's management. Our responsibility is
to express an opinion on these statements based on our audit.

We conducted our audit in accordance with generally accepted

accounting principles. Those principles require that we plan and
perform the audit to provide reasonable assurance about whether the
financial statements are free of misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, except for the effects of not capitalizing certain lease
obligations that should be capitalized in order to conform with
generally accepted accounting principles, the financial statements
referred to above present accurately the financial position of Novak
Corporation as of December 31, 2010, in conformity with generally
accepted accounting principles.

Henry and George, CPA

First I will mention the required features of audit report.

-An audit report must have an suitable and proper title such as Auditors
Report
-it must mention the specific addressee of the report. It may be shareholders
or even Board of Director of the company audited.
-the requirement to audit as per legal requirements must be stated.
-it must specify the financial statements that have been audited in the audit
report
-the audit report must contain the name of the company that is being
audited
-the date and period of the financial statements that are audited must be
mentioned
-the audit report must specify the audit standards and practices that are
being adopted in the auditing process
-the international Auditing Standards and guidelines that are being followed
must be specified. (US GAAP or IFRS).
-The users of audit report ought to be given assurance that the audit has
been conducted as per standards.
-it must also state the opinion of the auditor of the financial statements that
are presented as financial position and the results of the operations.

Now, the deficiencies in the above mentioned audit report:

-the Report Title is missing in the statement given

-the company being mentioned is wrong company. Instead of Nelson they
mentioned Novak
-the report did not mention the addressee to which was prepared
-they have mentioned examination Instead of Audit
-they did not mention the Auditing Principles and Standards that are
generally accepted in the state in which they are operating
-the list of financial statements like balance sheet and Profit and Loss that
were audited are not mentioned.

-[Auditors Signature]

[Auditors City and State]

[Date of the Auditors Report]

8. Question 2.2. (TCO G) The 1136 Tenants v. Max Rothenberg and

Company case (Chapter 5) established the need for an Engagement
Letter at the start of an audit. Discuss at least six of the matters that
should be specified in an engagement letter. Explain why this upfront
Engagement Letter is so important.

Engagement Letter
 In the commencement of the audit, the company should have written an engagement

letter to the auditors. An engagement letter is an important document in the relationship between

the company and client, as it provides written identification of the work, which will be done.

The engagement letter should specify the different matters including the following;

1. Nature of the engagement. This will include the description of facts and procedures,

which do not amount to an audit or a review.

2. Statement of the purpose of the engagement. This will identify and describe the role and

focus of the engagement process such as to determine the accuracy of the financial

transactions.

3. The identification of the financial information in which the agreed upon procedures takes

effect (Blay, Notbohm, Schelleman & Valencia, 2014). This will summarize the different

financial items whereby the auditors will apply the relevant agreed upon procedures.

4. Nature, timing and degree of applying the specific procedures. The identification and

evaluation of this detail is significant in determining the nature and implications of the

different audit procedures.

5. Expected form of the report of factual findings. This will detail the nature of the form of

reporting the audit results and findings obtained in a clear report format.

6. Limitation on the distribution process of the findings. This will identify the problems and

challenges likely to be faced during the collection of the audit findings and results.

Importance of the Engagement Letter

Having the engagement letter upfront will be important to the audit process. Engagement letter
uses simple language to explain the responsibilities of the auditors and the client. This is critical
in creating an effective communication network between the different parties as they focus on
the identification of the additional services required. The letter also reduces the confusion
between the client and the auditors as it explains what the audit engagement entails (Cox, 2013).
In addition, it involves the company about the audit tests, which will be based on the outcomes
of the internal controls. Statutory requirements will also be clearly outlined to avoid ambiguity
and noncompliance. As a result, the engagement letter is highly important towards the
commencement of the audit process.

An upfront engagement letter is very important as is discussed below:

1. It defines clearly the extent of auditors responsibilities and to minimize the

possibility of any misunderstanding between the client and the auditor.
2. It provides written confirmation of the auditors acceptance of his appointment
the scope of audit and form of his report.
3. Client becomes aware of the statutory responsibilities of the directors which in
no way are diminished by the appointment of an auditor.
4. Management is informed that the audit tests would be based upon results of
erahntian of internal control.
5. Client is explained the statutory requirements of the companys ordinance and
the matters to be report are satisfied by law; the auditor would be free to report
on the matter in respect of which he is not satisfied.
6. Client become informed about the other professional services that the auditor
can provide.
7. Client is briefed that the discovery of fraud in not the main aim of the audit.
8. Scope of special or additional work is also determined.
9. Basis of computation of frees are brought to the knowledge of client.

Question 5.5. (TCO J) (1) Identify the Processing Controls associated with a Computerized System
and identify the types of tests to be performed. (2) Identify the issues which an E-Commerce System
presents for an auditor (Points:30)