CPA Exam - AUD (Auditing and Attestation) Flashcards

Question 1

Audit Risk Model Formula

Accepted Answer

$AR = IR 	imes CR 	imes DR$

Where:
- $AR$ = Audit Risk
- $IR$ = Inherent Risk
- $CR$ = Control Risk
- $DR$ = Detection Risk

Question 2

Inherent Risk (IR)

Accepted Answer

The susceptibility of an assertion about a class of transaction, balance, or disclosure to a material misstatement, assuming there are no related internal controls.

Question 3

Control Risk (CR)

Accepted Answer

The risk that a material misstatement will not be prevented, or detected and corrected, on a timely basis by the entity's internal control system.

Question 4

Detection Risk (DR)

Accepted Answer

The risk that the procedures performed by the auditor will fail to detect a material misstatement. It is the only component of audit risk directly controlled by the auditor.

Question 5

Risk of Material Misstatement (RMM)

Accepted Answer

The combined assessment of inherent risk and control risk ($RMM = IR 	imes CR$). Represents the risk that the financial statements are materially misstated prior to the audit.

Question 6

Unmodified (Unqualified) Audit Opinion

Accepted Answer

Issued when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (e.g., US GAAP).

Question 7

Qualified Audit Opinion

Accepted Answer

Issued when financial statements contain a material misstatement or there is a scope limitation, but the effects are **material but NOT pervasive** ('except for' opinion).

Question 8

Adverse Audit Opinion

Accepted Answer

Issued when the auditor obtains sufficient evidence to conclude that misstatements are **both material and pervasive** to the financial statements.

Question 9

Disclaimer of Opinion

Accepted Answer

Issued when the auditor is unable to obtain sufficient appropriate audit evidence (severe scope limitation) or lacks independence, and the possible effects are **both material and pervasive**.

Question 10

COSO Internal Control Framework (CRIME)

Accepted Answer

The 5 interrelated components of internal control:
- **C**ontrol Environment
- **R**isk Assessment
- **I**nformation and Communication
- **M**onitoring Activities
- **E**xisting Control Activities

Question 11

Materiality

Accepted Answer

The magnitude of an omission or misstatement that makes it probable that the judgment of a reasonable user relying on the financial statements would be changed or influenced.

Question 12

Tolerable Misstatement (Performance Materiality)

Accepted Answer

The application of performance materiality to a particular sampling procedure. Set at an amount less than overall financial statement materiality to reduce the risk that aggregate undetected misstatements exceed materiality.

Question 13

Substantive Procedures

Accepted Answer

Audit procedures performed to detect material misstatements at the assertion level. Includes:
1. **Tests of Details** (transactions, balances, disclosures)
2. **Substantive Analytical Procedures**

Question 14

Tests of Controls

Accepted Answer

Audit procedures performed to evaluate the operating effectiveness of internal controls in preventing, or detecting and correcting, material misstatements at the assertion level.

Question 15

Attribute Sampling vs. Variables Sampling

Accepted Answer

- **Attribute Sampling**: Used in *tests of controls* to estimate the rate of control deviations.
- **Variables Sampling**: Used in *substantive testing* to estimate a total dollar amount or measure dollar misstatements.

Question 16

AICPA Code: 7 Threats to Independence

Accepted Answer

1. **Adverse Interest** (opposing client interests)
2. **Advocacy** (promoting client)
3. **Familiarity** (close relationship)
4. **Management Participation** (acting as management)
5. **Self-Interest** (financial benefit)
6. **Self-Review** (evaluating own work)
7. **Undue Influence** (coercion)

Question 17

Subsequent Events: Type 1 vs. Type 2

Accepted Answer

- **Type 1 (Recognized)**: Conditions existed on or before the balance sheet date $\rightarrow$ requires **financial statement adjustment**.
- **Type 2 (Non-recognized)**: Conditions arose after the balance sheet date $\rightarrow$ requires **disclosure only**.

Question 18

Emphasis-of-Matter Paragraph

Accepted Answer

A paragraph added to the audit report that refers to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding (e.g., going concern doubt, change in accounting principle).

Question 19

SSAE vs. SSARS

Accepted Answer

- **SSAE** (Attestation Standards): Applies to examinations, reviews, or agreed-upon procedures for subject matter other than historical financial statements.
- **SSARS** (Review/Compilation Standards): Applies to preparations, compilations, and reviews of historical financial statements for nonissuers.

Question 20

Management Representation Letter

Accepted Answer

A mandatory written letter provided by management to the auditor at the conclusion of the audit, bearing the same date as the audit report. Refusal to provide it results in a scope limitation requiring a **disclaimer or withdrawal**.

Question 21

Professional Skepticism

Accepted Answer

An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

CPA Exam - AUD (Auditing and Attestation)

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