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201

5FOCUS NOTES

CPAexcel®

EXAM REVIEW

Wiley

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201

5

AUDITING AND ATTESTATION

FOCUS NOTES

CPAexcel®

EXAM REVIEW

Wiley

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Cover Design by Wiley

Cover image: © turtleteeth/iStockphoto

Copyright © 2015 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic,

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they

make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically

disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended

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ISBN: 978-1-118-91775-6 (paperback); 978-1-119-05165-7 (ebk); 978-1-119-05172-5 (ebk)

Printed in the United States of America

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v

CONTENTS

Preface vii

About the Author ix

About the Contributor ix

Module 1: Professional Responsibilities 1

Module 2: Engagement Planning, Obtaining an Understanding, and Assessing Risks 32

Module 3: Understanding Internal Control and Assessing Control Risk 63

Module 4: Responding to Risk Assessment: Evidence Accumulation and Evaluation 95

Module 5: Reporting 156

Module 6: Accounting and Review Services 231

Module 7: Audit Sampling 247

Module 8: Auditing with Technology 263

Index 271

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vii

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

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Preface viii

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

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ix

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.

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Focus on

Professional Responsibilities—Module 1 1

FINANCIAL STATEMENTS, AN AUDIT AND AUDITED FINANCIAL STATEMENTS

FinancialStatement

CPA Audit

AuditedFinancialStatements

AuditReport

Prepared following aFinancial ReportingFramework (e.g., GAAP)

Conducted followingAuditing Standards(e.g., GAAS)

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Focus on

Professional Responsibilities—Module 1 2

DIAGRAM OF AN AUDIT

Plan Audit

Obtain Understanding ofClient and Its EnvironmentIncluding Internal Control

Assess Risks of Misstatementand Design Further Tests

Perform SubstantiveProcedures

Complete the Audit

Issue Audit Report

Perform Testsof Controls

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Focus on

Professional Responsibilities—Module 1 3

Principles Underlying an Audit

Purpose of audit

Premise of audit

Personal responsibilities of auditor -

Auditor actions in audit

Reporting results of an audit

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Focus on

Professional Responsibilities—Module 1 4

Auditing Standard Requirement Categories

Unconditional requirement

must is required

Presumptively mandatory requirement

-

should

Responsibility to Consider

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Focus on

Professional Responsibilities—Module 1 5

CODE OF PROFESSIONAL CONDUCT

Sections

Structure

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Focus on

Professional Responsibilities—Module 1 6

CODE OF PROFESSIONAL CONDUCT(CONTINUED)

Principles

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Focus on

Professional Responsibilities—Module 1 7

RULES AND APPLICABILITY

RulesPublic

PracticeBusiness Other

X X

X

X X

X X

X X

X X X

X

X

X

X

X

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Focus on

Professional Responsibilities—Module 1 8

Conceptual Frameworks

Members in public practice -

Members in business

-

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Focus on

Professional Responsibilities—Module 1 9

Threats and Safeguards Considered by Conceptual Frameworks

Threats Safeguards

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Focus on

Professional Responsibilities—Module 1 10

Relationship orcircumstance thatpotentially affects

compliance with Code

Does Code directly address?Does the relationship or

circumstance create one or morethreats to compliance with Code?

May provide service

Yes

Follow Code requirements

Do qualitative and quantitativefactors, including existing

safeguards, reduce the risk of non-compliance with the Code to an

acceptable level?

Do not provide professionalservice

May provide service

No

No

No

Yes

Yes

General Conceptual Framework Code of Professional Conduct Approach

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Focus on

Professional Responsibilities—Module 1 11

Independence Rule

covered member

-

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Focus on

Professional Responsibilities—Module 1 12

Independence Requirements for all Partners and Staff

-

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Focus on

Professional Responsibilities—Module 1 13

Additional Independence Requirements for Covered Members—Financial

impair the independence of both the member and the firm

-

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Focus on

Professional Responsibilities—Module 1 14

Additional Independence Requirements for Covered Members—Family

Immediate family -

Close relatives --

Other considerations for all relatives and friends

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Focus on

Professional Responsibilities—Module 1 15

Examples of Activities that Impair Independence

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Focus on

Professional Responsibilities—Module 1 16

Independence—Unpaid Fees

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Focus on

Professional Responsibilities—Module 1 17

Independence—Auditor on Engagement Considers or Takes Employment with Audit Client

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