[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for AUD.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Anonymous]

Question from Wiley CPA Excel:

Under the SSARS, a representation letter (“written representations”), signed by management, is required for:
Financial Statement Preparation: No
Financial Statement Compilation: Yes

Isn't a management representation letter only required for a review under SSARS?

[Forem004]

Yes it is required for a review.

[GiniC]

My Becker study materials don't indicate a Management Representations letter is required for compilations, and I just read the entirety of SSARS Section 80 (the one on Compilation Engagements) and it does not mention a management representation letter anywhere. My undergrad auditing textbook (McGraw Hill, by Messier, Glover, & Prawitt) specifically says that a management representations letter is NOT required for compilation engagements.

@cjhim – Is that the full text of the Wiley question? is it a True/False, with the correct answer being “False”?

[Forem004]

That's correct As well gini. A rep letter is not required for a compilation.

[Anonymous]

I was just going to post my question below when you guys are currently discussing about compilation engagement that does not really require a rep letter from the management. Hmmm, great to learn it now!

Which of the following procedures is more likely to be performed in a review engagement of a nonissuer than in a compilation engagement?

a.
Assisting the entity in adjusting the accounting records.

b.
Gaining an understanding of the entity's business transactions.

c.
Obtaining a representation letter from the chief executive officer.

d.
Making a preliminary assessment of control risk.
Explanation

Choice “c” is correct. Obtaining a representation letter from the CEO is more likely to be performed in a review engagement of a nonissuer (where obtaining the letter is required) than in a compilation engagement.
Choice “b” is incorrect. Gaining an understanding of the entity's business transactions would be performed in both a compilation and a review engagement.
Choice “d” is incorrect. Making a preliminary assessment of control risk would only be performed in an audit, not in a compilation or review.
Choice “a” is incorrect. Assisting the entity in adjusting (compiling) the accounting records is more likely to be performed in a compilation engagement than in a review

[Anonymous]

I got this question from a sim that I got wrong. Im a little confused on it.

What substantive procedure might you decide to perform to audit the assertion of cutoff for revenue?

The answer is “Inquire of the entity’s sales and marketing personnel or in-house legal counsel regarding sales or shipments near the end of the period and their knowledge of any unusual terms or conditions associated with these transactions”.

Isnt inquiring with employees more of a test of controls?

I thought the answer was “Send confirmations to customers with outstanding accounts receivable balances at the end of the year”.

[GiniC]

@JT-Frisco city –

It would help to know the list of available choices, but sending confirmation requests generally ask for the amount owed at the end of the year according to their records, rather than the timing information you need for cut-off. I'd be looking for source documentation that shows sales completed (including delivery/shipment, depending on shipment terms) at year end vs. orders that were not shipped.

Inquiry is a substantive procedure that can be used to test controls OR details. However, INQUIRY ALONE IS NEVER SUFFICIENT EVIDENCE – you have to follow up on the inquiry by inspecting source documents to support the information provided during inquiry.

[Anonymous]

Thank you for your response. Its ninja sim #48 question 5

Here are the other options…

1. Send confirmations to customers with outstanding accounts receivable balances at the end of the year

2. Inquire of the entity’s sales and marketing personnel or in-house legal counsel regarding sales or shipments near the end of the period and their knowledge of any unusual terms or conditions associated with these transactions

3. Interview employees involved in recording sales to obtain their insights about the risk of misstatement of revenues and how controls address this risk

4. No further substantive procedures are necessary if the tests of controls are OK

I would think the best answer is sending confirmations because I don't think inquire alone is sufficient. But thank you for your response. Ill read into this more. I didn't know inquire could be used like that.

[Forem004]

I believe you would also refer to the documents referenced in the discussion. Gini said it best on why confirmations could not satisfy the cutoff assertion and then the rest of the answers can be eliminated through process of elimination.

[GiniC]

I'm struggling a little with the MCQ below. I agree that tracing from shipping documents to sales invoices is the way to test completeness, but the question asks about understatement. In my mind, in order to address understatement you need to be checking the recording of the transactions. When I look at the flow charts, it seems like recording is happening off to the side. Can someone actually working in accounting or auditing tell me – how does the recording get done, and would that be a natural part of the tracing process?

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the:
a. Shipping documents to the sales invoices.
b. Sales journal to the cash receipts journal.
c. Sales invoices to the shipping documents.
d. Cash receipts journal to the sales journal.

Explanation
Choice “a” is correct. Detecting a possible understatement in sales is tantamount to testing completeness (i.e., if an understatement is found, sales are not complete). To test completeness, one needs to start with supporting documentation, such as shipping documents, and trace forward to recording in the accounting records, such as the sales invoices and sales journal. Should the auditor find a shipping document for which there is no entry in the sales journal, an understatement error (or a completeness problem) will have been discovered.

Choice “c” is incorrect. Tracing from the accounting records, such as sales invoices, to supporting documentation, such as shipping documents, tests for overstatement, or tests existence. Should the auditor find a sales invoice for which there is no shipping document, an overstatement error will have been discovered (i.e., perhaps a fictitious sale has been recorded).

Choice “d” is incorrect. Tracing from the cash receipts journal to the sales journal may help the auditor verify whether the receipt was properly recorded (i.e., once one knows to which sale the receipt relates, one can verify whether the appropriate customer balance was reduced), but it does not aid the auditor in detecting possible understatements of sales. In order to detect understatements, one must trace from supporting documentation to accounting records, not compare internal consistency among accounting records.

Choice “b” is incorrect. Tracing from the sales journal to the cash receipts journal aids the auditor in identifying sales for which payment has not yet been received, but it does not aid the auditor in detecting possible understatements of sales. In order to detect understatements, one must trace from supporting documentation to accounting records, not compare internal consistency among accounting records.

[Forem004]

Recording would happen from the invoices to the books, so if the invoice is understated, then the books will be as well.

[Anonymous]

I am confused about reporting on comparative FS.
Sentence#1: When the periods presented in comparative FS are either all compiled or all reviewed, a continuing accountant should UPDATE THE REPORT ON THE PRIOR PERIOD AND ISSUE IT AS PART OF THE CURRENT REPORT.
Sentence#2: In the event that accountants have reviewed the prior period statements but compiled the current period statements, they can do one of the following:
(a) Issue a compilation report and add a paragraph to the report on the current period statements, or
(b) REISSUE THE PRIOR REVIEW REPORT.

What I am confused about is the use of the words (UPPERCASE WORDS ABOVE) and the report dates to use:
-UPDATE
-ISSUE
-REISSUE

Could someone shed light on this? Thanks.

[Spartans92]

Question on Sample size. When IR increases DR decreases.. isn't the sample size smaller? I thought its smaller because Low DR means more substantive test and more testing means we can have a smaller sample size..

BEC- PASS

[Forem004]

Per a prior year Becker book that I have, Update can mean to reaffirm or it can mean to change the original opinion as a result of changed conditions or information that comes to the auditor's/accountant's attention during the current engagement.

I believe you would issue the changes within the current year report as an other matter paragraph. Someone can add some explanation to this part if they would like.

The prior report could be reissued by removing or adding information that is not necessary or is in light of the new information.

[Forem004]

Spartans92, Do you have a specific example, because higher inherent risk typically leads to a larger sample size.

[Author]

Replies