NINJA CPA REVIEW

AUD ASSASSIN 2012

   

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Table of Contents (v. 12.0) The NINJA CPA Review Framework I. Engagement Planning 8 II. Internal Control 22 III. Auditing & IT 33 IV. Evidence & Risk 39 V. Audit Reports 53 VI. Audit Sampling 65 VII. Professional Responsibilities 75 VIII. International Auditing 83

   

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The NINJA CPA Review Framework

NAIL THE VIDEOS Watch your CPA Review videos first – before working any assigned homework questions. The CPA Review industry says to watch a section of CPA Review video and then work the accompanying MCQs. This perspective stems from the old-school approach to the paper and pencil exam where you had to sit in a live classroom and learn from an instructor on weekends. Today, there is a smarter way to study. You don’t have to go to a weekend live course. You can fire up the laptop on a Tuesday morning and knock out two hour of material before you even brush your teeth. If you work MCQs in week one over your week one topic, guess what? – you will work them again in week 5 or 6 when you review because you will forget what you learned. If you watch a video in week one and score an 85 on the corresponding MCQs, will you be able to score an 85 four weeks later? Not likely. You will need to work them again anyway and it’s not a smart use of study time. Instead, let the NINJA Framework guide you.

INTENSE NOTES Repeat after me: “PUT THE HIGHLIGHTER DOWN.” Which method do you think will help you learn the material better – painting printed words in a book with pretty florescent colors or writing them down on a legal pad and thinking about the information?

   

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Grab a stack of legal pads, put the highlighter down, and start writing. Many people have said that instead of taking their own notes, they just re-write the material inside of this study guide, which is fine too.

NON-STOP MCQS Now is the time to start working multiple-choice questions and do them with a focused frenzy. Do so many MCQs that you’re absolutely sick of them. As you encounter little “fact nuggets” that you didn’t know or are prone to forget, write it down and add it to your voluminous stack of notes.

JUST RE-WRITE IT This is where it gets tedious. This is also where the pay off happens. You may be familiar with the fact that if you had a choice between $3 Million and 1¢ doubled daily for 31 days; the penny doubled for 31 days ends up tripling the $3 Million. The payoff however doesn’t happen until the 31st day. The road is long, but ends up being worth it in the end. The same goes for re-writing your study notes. The thought of grabbing that stack of legal pads and going to town re-writing what you’ve already written may sound like a ridiculous suggestion at first, but I am a firm believer in its impact. Merely writing down your notes and then reviewing them before your exam doesn’t have near the impact as taking your furious scribbles and converting them into re-packaged, easily-digestible “fact nuggets”. Not only will your notes mean more when you’ve whittled away the non-essentials, but you are actually learning the

   

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material twice. Re-processing the material by re-writing your notes is like letting the information marinade in your mind. Just like a well-prepared steak, you will taste the payoff of this extra step. Don’t like taking notes? No problem. Re-write these NINJA Notes instead. You will absorb the material better vs. reading only. Plan wisely because this will likely take a week to complete. “I have found this to be unbelievably helpful! This is now my second section that I have followed this piece of advice and, once again, I am amazed at how much the material "clicks" as I review and write the notes a second time. Sure, it's time-consuming, but for me, it is worth it. No questions asked. Not only does it help with processing and understanding the material, but it also results in a better, more organized set of study notes to use for review up until exam date.” – Sandy

ALL COMES TOGETHER You have watched the videos. You’ve taken ridiculous notes and have done hundreds (thousands?) of multiple-choice questions. You’ve re-written your notes. Now, study that stack of review Gold in your hands multiple times, work MCQs over weak topics, study your notes even more, and then go in and PASS the CPA Exam.

   

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How to use the NINJA ASSASSIN READING You've invested in the ASSASSIN, now let it go to battle for you. You should read the ASSASSIN as many times as possible. Carry it with you wherever you go. Do you have an iPhone®, iPad®, or similar device(s)? Simply load the PDF onto the device and if you have 5 minutes of downtime, you have 5 minutes of study time.

It is recommended that you read the ASSASSIN at least five times leading up to your final two weeks of exam prep. If you have 6 weeks to study, then you need to complete this is 4 weeks. 5 weeks to study, then complete it in 3. 4 weeks = 2 weeks. You get the picture. The point is: plan, plan, plan and budget, budget, budget, budget because exam day is looming. 6-Week Plan: Approx. 85 pages x 5 reads /4 weeks / 7 days per week = Approx. 15 pages per day 5-Week Plan: Approx. 85 pages x 5 reads /3 weeks / 7 days per week = Approx. 20 pages per day 4-Week Plan: Approx. 85 pages x 5 reads /2 weeks / 7 days per week = Approx. 30 pages per day 3-Week Plan: Approx. 85 pages x 5 reads /1 weeks / 7 days per week = Approx. 61 pages per day

   

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RE-WRITING This step is optional, but it won over a lot of skeptics with its results. This is not mainstream advice. This is the NINJA way. The mainstream way of studying for the CPA Exam is old-fashion and outdated. Forget the old way. You are a NINJA now.

Now is the time to either 1. Re-write your own CPA Exam notes or 2. Re-Write the ASSASSIN Notes. Plan on investing a week doing this and you should expect to get through 12 pages a day (Approx. 85 pages / 7) in order to stay on track. After this, you will still have one week left to put the finishing touches on your CPA Exam review prep – i.e. doing a ton of MCQs.

   

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I. Engagement Planning THE AUDITOR

Provides users of financial information with

o Reasonable assurance that the financial statements are not materially misstated

NOT responsible for detecting theft or fraud

o Instead, provide reasonable assurance

The earlier the auditor is hired prior to the Balance Sheet Date, the better for audit planning and efficiency

o Audit procedures can be carried out at interim

dates if Control Risk for the accounts/transactions is low

Review changes in balances at year-end

If the year has already been closed, an

auditor can take the engagement if they are able to overcome the limitations of the engagement

An auditor uses Professional Skepticism to

o Plan the Scope of the Audit

o Plan the Objectives of the Audit

When planning an audit

o Role and involvement of client’s Internal Auditors

should be decided

   

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o Analytical procedures performed

Compare Actual vs. Forecasted Data

o If issues relating to Predecessor Auditor’s work on previous financial statements come up during the current audit

Auditor must have client’s permission to discuss the issue

o Audit procedures that are carried out by assistants

Were they adequately performed?

• Review the working papers

Are the results consistent with the audit

report?

o Audit Strategy should be mapped out

What are the reporting objectives?

What is the scope of the audit?

   

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GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)

Materiality and Audit Risk are foundations of GAAS

o Measure Auditor’s

Professional Qualifications

Judgment

General  Standards  (TIP)  

• Education  and  Audit  Experience  

Training  and  ProEiciency  

• In  Fact  and  Appearance  • Honest  • No  Direct  Financial  Interest  • No  Indirect  Material  Financial  Interest  

Independence  

• Technical  abilities  mirror  those  held  by  peers  in  the  profession  • Follow  GAAS  Standards  • Obtain  a  Reasonable  Level  of  Assurance  • Maintain  Reasonable  Level  of  Skepticism  • Supervise  Audit  Staff  • Review  judgment  at  every  level  

Professional  Care  

   

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Standards  of  Fieldwork  (PIE)  

• Audit  should  be  adequately-­‐planned  and  the  work  of  any  supporting  staff  should  be  supervised.  

Planning  and  Supervision  

• Auditor  must  understand  the  entity  and  its  internal  control  environment.  

Internal  Control  

• Auditor  must  obtain  sufEicient  &  appropriate  audit  evidence.  

Evidence  

Standards  of  Reporting  (CDOG)  

• Consistency  is  Implied.  Report  only  refers  to  consistency  if  accounting  principles  have  not  been  consistently  applied  period-­‐to-­‐period.  

Consistency  

• Adequacy  is  Implied.  Report  only  refers  to  disclosures  if  disclosures  are  NOT  adequate.  

Disclosures  

• Audit  Opinion  is  based  on  Financial  Statements  as  a  whole.  

Opinion  

• Audit  Report  MUST  state  whether  the  Einancial  statements  have  been  prepared  in  accordance  with  US  GAAP.  

GAAP  

   

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PRIOR TO ACCEPTING AUDIT ENGAGEMENT

Review client’s Financial Statements

Speak to 3rd Parties

Contact Predecessor Auditor to evaluate whether engagement should be accepted

o Must Have Permission from Client

No Permission = No Engagement

o Why the Auditor Change?

o Any Serious Discussions with Audit Committee?

o How is Management Integrity? Disagreements?

o How was Internal Control?

o Understand Industry or Be Willing to Learn

o Consider Scope Limitation

Limited evidence available = No Engagement

AUDIT ENGAGEMENT AGREEMENT

Must be written and covers:

o Objectives of Engagement

o Limitations of Engagement

o Responsibilities of Management

Provide written assertions

   

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o Responsibilities of Auditor

Limited Error/Fraud responsibility

o Expectations of Access to Records

o Financial Statements (and Disclosures) are Management’s Responsibility

o Compliance with Laws

o Internal Control

AUDIT COMMITTEE

Part of the Board of Directors

Corporate Officers Not Allowed

Responsible for Hiring Auditor

o Oversees Internal Control

o Must Agree with Auditor on

Responsibility of the Parties

Audit Fee

Timing of the Audit

Audit Plan

o Acts as Liaison Between Auditor and the Board

Auditor Communicates Concerns about

Internal Control Deficiencies

   

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Errors

Fraud

Illegal Activities MATERIALITY

Quantitative and Qualitative Measurements

Measured on the Transactional or the Financial

Statement level

o Audit plan based on smallest misstatement that could be material to Financial Statements

o If materiality thresholds differ among Financial

Statements, then use the lowest threshold amount. DON’T average them.

Based on Auditor Judgment

o Auditor must consider needs of users

Audit should be planned to allow “reasonable

assurance” that no material misstatements exist

As acceptable Materiality level Decreases

o Auditor must find smaller misstatements

More individual account testing

o More testing closer to Balance Sheet Date

   

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AUDIT RISK

Audit Risk (AR)

o Inherent Risk x Control Risk x Detection Risk

o Risk that material mistakes, errors, omissions, or fraud will result in an inaccurate audit report

o Based on Auditor Judgment

o Measured both Qualitative and Quantitatively

Control Risk (CR)

o Will Internal Control detect error or fraud?

o Auditor cannot control CR

Inherent Risk (IR)

o Which transactions have a higher level of risk?

o Auditor cannot control IR

Detection Risk (DR)

o Will the auditor fail detect a material

misstatement?

o Auditor CAN control DR

Do more testing at year-end

Increase substantive testing

o Less Acceptable DR = Run More Substantive Tests

   

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o More Acceptable DR = Run Less Substantive Tests

o More Substantive Tests = Less Audit Risk

Detection Risk decreases

(↓AR = IR x CR x ↓DR)

o Less Substantive Tests = More Audit Risk

Detection Risk increases

(↑AR = IR x CR x ↑DR)

Quantitative Measurements

o Inherent, Control, and Detection Risk can all be measured in terms of percentages

Non-Quantitative Measurements

o Inherent, Control, and Detection Risk can all be measured in terms of acceptable ranges

FRAUD AND ILLEGAL ACTS

Management’s responsibility to FIND and PREVENT

Auditor’s responsibility:

o ASSESS THE RISK that such things will lead to

material misstatements.

o Design the audit to provide reasonable assurance against

Fraud

   

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Illegal acts that directly affect the F/S

If illegal (and not fraud), auditor should

seek to understand the situation and whether it affects the Financial Statements

Material errors have been detected

o Report all management fraud to Audit Committee

Minor fraud by low-level employees?

• Don’t report to Audit Committee

Minor fraud by management?

• Report to Audit Committee

o Required Inquiries and Procedures

Management inquiries

Analytical Procedures

Discussions with audit personnel about

Fraud leading to material misstatement

Fraud is intentional (Misappropriation)

o Born out of (RIO)

Rationalization

Incentive

   

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Opportunity

Errors are unintentional (Misinterpretation)

Fraud Red Flags

o Current audit procedures may need to be re-considered if red flags exist.

o Examples of Audit Red Flags:

Management compensation tied to stock

Aggressive financial forecasting

Former auditor disagreed with Management

Records not available for audit

A Fraud Risk Factor

o Has been observed in similar situations

Large sums of cash on hand

Earnings growth without cash flow

o Does NOT necessarily mean that there is a

material weakness in internal control

Internal control analysis can result in the conclusion that Internal Control is weak, but probably won’t identify illegal acts

o Leads to auditor taking action

Strives to make audit engagement

procedures less patterned and predictable

   

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Re-evaluates management’s application of accounting procedures

Finds and assigns audit personnel with

relevant skills in this area

Documentation

o Any fraud risks identified that could lead to material misstatement

o Audit procedures performed to assess risks

o Nature of communication made to audit

committee and company management

o Disclosure to third parties regarding fraud not normally the auditor’s responsibility

Fraud by management should normally be

reported to Audit Committee, not SEC SARBANES-OXLEY ACT OF 2002

Created the PCAOB

Designates Officer responsibility for internal control

o Must disclose significant internal control

weaknesses to auditor and audit committee

o Must disclose any level of fraud discovered by employees with internal control responsibilities

   

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AUTHORITATIVE LITERATURE HIERARCHY

Statements on Auditing Standards (SAS) ↓

Auditing Interpretations, AICPA Guides & SOPs ↓

Industry Articles (no authority)

QUALITY CONTROL FOR CPA FIRMS

Firm Leadership exhibits quality and leads by example and sets the tone for the organization

Firms should Monitor and document that its policies and

procedures are being followed

Firms should have Relevant Ethical Requirements

Acceptance and continuance of client engagements should continue to be evaluated for

o Client Integrity

Does management have integrity?

o Auditor Competency

Is the firm competent enough to take the

engagement?

o Legality

Firm should have Competent and Ethical personnel

Firm engagements are performed, supervised, and reviewed in accordance with professional standards and regulations

   

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COMPILATION SERVICES

SSARS - Statements on Standards for Accounting and Review Services to be followed

o Non-Public entities only

Independence NOT required for Compilations

o No Internal Control work allowed

o No Assurance given

A CPA should comply with provisions of SSARS that

apply to Compilation Engagements when preparing unaudited Financial Statements to a non-public company to a client or third party

Must understand client industry

REVIEW SERVICES

SSARS - Statements on Standards for Accounting and

Review Services to be followed

o Non-Public entities only

Provides negative assurance

Independence IS required for Reviews (AR 100)

o No Internal Control work allowed

o Performs Analytical Procedures

o No Material Indirect financial interest allowed

o No Immaterial Direct financial interest allowed

   

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Must understand client industry ATTESTATION SERVICES

Independence Required

CPA expresses a conclusion about an assertion

o Is the client compliant with laws?

CONSULTING SERVICES

Independence not required

PROSPECTIVE FINANCIAL STATEMENTS

Report is restricted to specified users

Agreed-upon procedures implemented

This Chapter only covers 14% of AUD. Get the rest of the AUD NINJA Notes: http://www.another71.com/goto/AUD/

   

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NINJA CPA REVIEW

AUD ASSASSIN 2012

   

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Table of Contents (v. 12.0) The NINJA CPA Review Framework I. Engagement Planning 8 II. Internal Control 22 III. Auditing & IT 33 IV. Evidence & Risk 39 V. Audit Reports 53 VI. Audit Sampling 65 VII. Professional Responsibilities 75 VIII. International Auditing 83 http://www.another71.com/goto/AUD/