[jeff]

Welcome to the Q1 2017 CPA Exam Study Group for AUD. 🙂

[mooseonloose]

Do we give positive assurance or negative assurance for comfort letter? I find this question confusing:

Which of the following matters is covered in a typical comfort letter?
a.Positive assurance concerning whether unaudited condensed financial information complied with generally accepted accounting principles.
b.Negative assurance concerning whether the entity's internal controls operated as designed during the period being audited.
c.An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.
d.An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act of 1984.

Explanation
Choice “c” is correct. In a typical comfort letter, the accountants express an opinion (i.e., positive assurance) concerning the financial statements' compliance (as to form) with the pertinent accounting requirements of the SEC.
Choice “b” is incorrect. No assurance is generally provided in a comfort letter regarding the operation of an entity's internal control.
Choice “d” is incorrect. A typical comfort letter is addressed to the underwriters of the securities. Government Auditing Standards and the Single Audit Act are not applicable to a comfort letter related to the issuance of securities.
Choice “a” is incorrect. Negative assurance (not positive) is typically provided regarding unaudited condensed financial information.

[wowwow93]

An auditor should obtain written representations from management concerning litigation claims and assessments. These representations may be limited to matters that are considered either individually or collectively material, provided an understanding on the limits of materiality for this purpose has been reached by

A The auditor and the client’s lawyer.
B Management and the auditor.
C Management, the client’s lawyer, and the auditor.
D The auditor independently of management.

B. This answer is correct because materiality should be determined by management and the auditor. The client’s lawyer only becomes involved when an inquiry has been directed to him/her.

Can someone explain to me why the correct answer is B? Why would mgmt be involved in determining materiality? I thought this is the CPA's responsibility

[curlyhare]

@wowwow93

Before I go further, I found the answer in AU 337.09; please read for yourself. It's a lengthy statement ending in,

“Inquiry need not be made concerning matters that are not considered material, provided the client and the auditor have reached an understanding on the limits of materiality for this purpose.”

the trick of the question is noticing the statement “for this purpose.” The “purpose” is to provide a letter to the lawyer requesting information litigation claim infomation. In this instance the item assessed for materiality is litigation claims. Management and the auditor will discuss the claims and determine what is material [aka litigation that is likely to actually be executed or may cause harm]. Large companies get tons of claims, many result in nothing; all claims are not material.

Hope this is helpful

[CPAIN2K17]

@mooseonloose I believe negative assurance on whether the FS are in the correct form for the SEC (when the company is planning on going public usually).

[mooseonloose]

thanks @CPAIN2K17

Can anyone give me example of detention risk, inherit risk, control risk, audit risk?

[Anonymous]

Risk is essentially a probability or a likelihood of something happening. So audit risk is the risk that the auditor gives an unmodified opinion they shouldn't

Audit Risk= RMMx DR
= IRx CR x DR

inherent as the word implies means naturally occuring. So inherent risk is the risk of a misstatement occuring without considering any controls. So if a company is in an industry with super complex accounting rules, odds of someone making a mistake in booking an entry is higher. Another would probably be lack of skilled personnel booking journal entries.

Control risk is the risk that with controls in place, the controls wont detect a misstatement in the financials in a timely manner

Think of detection risk as the size of a fishing net. If you want to catch smaller misstatements, the size of your net should be smaller. Detection risk is essentially what the auditor controls.they have zero cntrol over inheren risk and control risk. So depending on the initial assessment of the client the auditor determines how much evidence to gather. If they believe there might be lots of misstatements, then detection risk is lowered.

[wc4044]

Taking AUD 2/17 and honestly I'm excited for this one. I'm still nervous and am trying to do it while balancing grad school (my grad school grades will be happy when this is over). I think I've been through everything enough to come out with a passing score and I feel better about it so far than I did with FAR and BEC. I'm just so excited to potentially be done. This CPA journey has been a marathon I'm glad I don't have to run again. Any advice on how to best spend my time for the last week of studying?

[mooseonloose]

Transaction cycles are killing me. like really wth is this even. I have becker, anyone have any tips on how to tackle this chapter.

[Spartans92]

just wondering… how possible is it to complete Chapter 5 and 6 in one day using becker? My exam is actually schedule for the end of the month. Im somewhat behind but will be finishing up Chapter 4 tomorrow. Im trying to hit the last 2 chapters on sunday so I can review 2 weeks.

Embarrassingly to say but its my 3rd time so the material isn't all that new to me. Been scoring in around 77's to high 80's, nothing less. Take that as a good sign.. Could be better. I dont want another 74. Work has been preventing me to study 🙁

BEC- PASS

[Spartans92]

@moose, post some questions here. I took 3 days to spread out that section and I just finished.. hated it even 3rd time around. Wouldn't say I'm a master but I have a decent understanding. Sometimes its very logical.

BEC- PASS

[mooseonloose]

Spartan, I am at the point where I don't even know the purpose of transaction cycles and whats cover u suppose to do. I am so lost. I skipped chapter 4 and went on to chapter 5. Sample is confusing as well, other than that I think chapter 5 and 6 is doable in a day.

[curlyhare]

@Mooseonloose

Becker, does a very confusing job of teaching cycles. The best way to understand it is to read each cycle (learn revenue and spending cycles first) then first understand what department the cycle starts in thru where it ends. Once you have that down then focus on what personnel in each department does (what inventory/document they handle), then put it together (where inventory/documents originate and who originates to where they end up). It helped me to do this by literally drawing it out. For example, for the sales (revenue) cycle, I drew a sales person (creates sale order) at a desk taking a sale from a customer in the sales department, then drew an arrow from them to the credit manager in the billing department (approves customer credit) , then drew an arrow to the next department, and so forth. After doing this it all seemed so easy, and then it helped me to decipher that awful flowchart Becker has in the book. (I failed audit twice with Becker btw and then got Roger, the cycles are explained so much better). You can also YouTube the cycles, an instructor may explain it better, but I recommend drawing it out. Once you draw it yourself it really sticks.

[mooseonloose]

@thanks! I actually have roger videos as well. I will check it out once I am done reviewing chapter 1,2, and 3. How did you deal with sampling?

[Operation_CPA]

Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk?

…….. a.Management's attitude toward information processing and accounting departments.
…….. b.The suitability of the client's lines of reporting.
…….. c.Physical proximity of the accounting function to upper management.
…….. d.The organization's recruiting and hiring practices.

Some of these internal control questions are confusing / tricky. I chose A, but the correct answer is B. Wouldn't the organizational structure have more to do with the “tone at the top” versus the clients line of reporting? I don't really understand why B is a better answer. Really trying to plow through this information as quickly and efficiently as possible but busy season hours are limiting my time to study. Any help is appreciated.

[mooseonloose]

Control environment is “tone at the top” Organizational structure is one of the principle of control environment.

Organizational structure, ” Management establish an organizational structure, including reporting lines, authorities, and responsibilities, that is appropriate to the organization objectives.”

If you have becker, check out BEC chapter one, page 13.

[Author]

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