[jeff]

Free Study Planner, Notes, Audio, Flashcards: https://www.another71.com/cpa-exam-study-plan/

Free CPA Exam Survival Guide: https://www.another71.com/cpa-exam-survival-guide/

[jgarcia09]

cpa chasing1

That makes sense how you explained it. Thank you!

[Anonymous]

Does this make sense? I thought the auditor couldn't reduce the control risk

Due to a change in the economic environment, the auditor has determined that a client’s inherent risk (IR) has increased in comparison to the prior year. In order to maintain an acceptably low level of audit risk, the auditor may:

I Reduce control risk by performing more tests of controls and placing more reliance on client internal controls

II Reduce detection risk by enhancing the nature, timing, or extent of substantive testing

a I only

b II only

c Neither I nor II

d Either I or II, or both – correct

[Anonymous]

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

A.

Distributing paychecks directly to department employees

B.

Setting the pay rate for departmental employees

C.

Hiring employees and authorizing them to be added to payroll

D.

Approving a summary of hours each employee worked during the pay period

[Anonymous]

aspiring1accountant,

is the answer D?

[mtwst113]

Definitely D.

BEC | √
AUD| √
FAR| Spring 2015

[mtwst113]

Sorry Anna, I thought you were asking about the question aspiring accountant posted.

For your question, D is correct (Either I or II). While the auditor cannot change control risk, an auditor can change detection risk. One way to go about that is, from the first option, “performing more tests of controls and placing more reliance on client internal controls”. Again, IR and CR aren't able to be changed by the auditor…in option I the auditor is lowering detection risk (the chance we won't catch something) by testing the clients controls more extensively (thus increasing our confidence that their controls will prevent misstatements). While this technically doesn't reduce control risk in the numeric sense, it does change how comfortable we are that the controls are operating effectively, which is why the auditor can reduce detection risk.

For option II, “Reduce detection risk by enhancing the nature, timing, or extent of substantive testing”, this is correct also because the other way to reduce detection risk is to increase substantive testing. In option 1 we were getting comfort that the controls operate effectively by testing them….option 2 is justifying the reduction in detection risk based on the fact that we are doing more testing, or modifying it's timing (i.e. moving it from interim to year end).

Let me know if you have any questions on this.

BEC | √
AUD| √
FAR| Spring 2015

[Anonymous]

Thanks mtwst113,

I have doubts about option I, it literally states “Reduce CONTROL risk by performing more tests of controls and placing more reliance on client internal controls”/ As if the use of thermometer could reduce fever

[mtwst113]

Maybe this will clear it up. We aren't reducing control risk….we are reducing our *Assessment* of control risk.

BEC | √
AUD| √
FAR| Spring 2015

[Anonymous]

That would make sense, yes

[Anonymous]

Still confused about kiting, why does check 404 indicate kiting? Besides, how can money leave one bank on Jan 2nd and be received by another 2 days earlier?

There is an explanation to a similar question per Roger: Kiting is a fraud scheme in which transfers are recorded in the account receiving the money in a period earlier than the period in which the disbursement is recorded. The date on which the bank recognized the receipt or disbursement is NOT relevant.

The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ending December 31, 20X1. Assume that all checks are dated and issued on December 30, 20X1.

Disbursement Date Receipt Date

chk No….from…….to…….Books…..Bank……Books…..Bank

101….National..Federal…Dec. 30..Jan. 4…..Dec. 30….Jan. 3

202 County State……Jan. 3…..Jan. 2…..Dec. 30….Dec. 31

303 Federal American….Dec. 31..Jan. 3….Jan. 2….Jan. 2

404 State Republic….Jan. 2….Jan. 2……Jan. 2…..Dec. 31

Which of the following checks might indicate kiting?

A.101 and 303

B. 202 and 404 correct

C. 101 and 404

D. 202 and 303

[Anonymous]

Is this a bad question? I think this is a trick question because the auditor would not include anything in a management representation letter. Such document is prepared by management, not the auditor.

---

Which of the following matters would an auditor most likely include in a management representation letter?

A. Communications with the audit committee concerning weaknesses in internal control

B. The completeness and availability of minutes of stockholders' and directors' meetings

C. Plans to acquire or merge with other entities in the subsequent year

D. Management's acknowledgment of its responsibility for the detection of employee fraud

B. Management's letter of representation would ordinarily include references to the following:

Management's responsibilities, as set out in the terms of the audit engagement for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework

Management's acknowledgment of their responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error

Acknowledgment of their responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud

Significant assumptions used in making accounting estimates, including those measured at fair value, are reasonable.

Related party relationships and transactions have been appropriately accounted for and disclosed.

All events subsequent to the date of the financial statements and for which the applicable financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.

The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to the representation letter.

The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with the applicable financial reporting framework.

Management provided the auditor with:

access to all information, of which they are aware, that is relevant to the preparation and fair presentation of the financial statements such as records, documentation and other matters;

additional information requested for the purpose of the audit; and

unrestricted access to persons within the entity the auditor determined it necessary to obtain audit evidence.

All transactions have been recorded in the accounting records and are reflected in the financial statements.

Disclosure of the results of management's assessment of the risk that the financial statements may be materially misstated as a result of fraud

Management has no knowledge of any (or disclosed to the auditor all information that they are aware of regarding) fraud or suspected fraud that affects the entity and involves:

management,

employees who have significant roles in internal control, or

others when the fraud could have a material effect on the financial statements.

Management's acknowledgement of (or no knowledge of any; or disclosure to the auditor of all information that they are aware of regarding) allegations of fraud, or suspected fraud, affecting the entity's financial statements communicated by employees, former employees, analysts, regulators or others

Management's disclosure of all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements

Disclosure of (have disclosed to the auditor all known actual or possible; or are not aware of any pending or threatened) litigation, claims, and assessments whose effects should be considered when preparing the financial statements (and management has not consulted legal counsel concerning litigation, claims, or assessments)

Management's acknowledgment of disclosing the identity of the entity's related parties and all the related party relationships and transactions of which they are aware

[mtwst113]

chk No….from…….to……. Books… .. Bank.A… .Books….. Bank B

202 County State…… Jan. 3….. Jan. 2….. Dec. 30….Dec. 31

Kiting is successful because of the lag-time from when a check is deposited to when it is actually cleared. For check 202, assume that Bank A has a balance of $0. An employee writes a check from Bank A on December 30th for $1000 and deposits it into Bank B that same day. Also the same day, the employee immediately writes a check for $1000 from Bank B and goes back to Bank A to deposit it. By the time Bank B goes to clear the check that the employee wrote to Bank A on December 31, it is already January 3rd. Since Bank A had the $1000 deposit available on Jan 2, it will appear that the account had sufficient funds, and so Bank B will honor the check that was written. Another website called it a “playing float” because no funds actually ever existed.

BEC | √
AUD| √
FAR| Spring 2015

[mtwst113]

I think part of managements rep letter would confirm that oral evidence (minutes)supplied during the engagement was complete and made available to the auditor. That's definitely a weird question though, since management writes the rep letter.

BEC | √
AUD| √
FAR| Spring 2015

[Anonymous]

I understand why it's check 202, but not 404. Regardless of when the bank recorded the transfer, books were not over/understated

[mtwst113]

chk No….from…….to……. Books… .. Bank.A… .Books….. Bank B

404 State Republic…. Jan. 2…. Jan. 2……Jan. 2…..Dec. 31

The exact timing for check 404 is less clear-cut than 202 was..but the questions asks Which of the following checks MIGHT indicate kiting. We'de have to see the exact date and time of the transactions for 404 to know for sure, but the dates lead you to believe that it's definitely possible.

BEC | √
AUD| √
FAR| Spring 2015

[Author]

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