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ffirs.indd 2 10/13/2014 12:37:36 PM Wiley CPAexcel ® EXAM REVIEW STUDY GUIDE JANUARY 2015 2015 ffirs.indd 1 10/13/2014 12:37:36 PM ffirs.indd 2 10/13/2014 12:37:36 PM O. Ray Whittington, CPA, PhD AUDITING AND ATTESTATION 2015 Wiley CPAexcel ® EXAM REVIEW STUDY GUIDE JANUARY 2015 ffirs.indd 3 10/13/2014 12:37:36 PM Cover Design: John Wiley & Sons, Inc. Cover image: © iStockphoto/turtleteeth The following items, copyright © by the American Institute of Certified Public Accountants, Inc., are reprinted with permission: 1. Material from Uniform CPA Examination Questions and Answers, 1978 through 2014. 2. Information for Uniform CPA Examination Candidates, Board of Examiners, 2013. Material from the Certified Internal Auditor Examination, Copyright © 1994 through 1997 by the Institute of Internal Auditors, Inc., are reprinted and/or adapted with permission. Material from the Certified Management Accountant Examinations, Copyright © 1993 through 1997 by the Institute of Certified Management Accountants, are reprinted and/or adapted with permission. Material adapted, with permission, from Writing for Accountants, Aletha Hendrickson, South-Western Publishing Co., 1993. 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, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per- copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/ permissions. 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 by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the US at 800-762-2974, outside the US at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our website at www.wiley.com ISBN 978-1-118-91766-4 (paperback); 978-1-119-04753-7 (ebk); 978-1-119-04757-5 (ebk) Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd 4 10/13/2014 12:37:36 PM Proudly sourced and uploaded by [StormRG] Kickass Torrents | TPB | ET | h33t v CONTENTS Preface vii About the Author ix About the Contributor ix INTRODUCTION 1 Chapter 1: Beginning Your CPA Review Program 3 Chapter 2: Examination Grading 17 Chapter 3: Solutions Approach 19 Chapter 4: Taking the Examination 27 Chapter 5: Exam Content Overview 31 AUDITING AND ATTESTATION 39 Module 1: Professional Responsibilities 41 Module 2: Engagement Planning, Obtaining an Understanding of the Client and Assessing Risks 99 Module 3: Understanding Internal Control and Assessing Control Risk 161 Module 4: Responding to Risk Assessment: Evidence Accumulation and Evaluation 229 Module 5: Reporting 315 Module 6: Accounting and Review Services 413 Module 7: Audit Sampling 453 Module 8: Auditing with Technology 493 Module 41: Information Technology (Supplement) 511 APPENDICES 543 Appendix A: Outlines of Professional Standards 545 Appendix B: Auditing and Attestation Sample Examination 675 Appendix C: Sample Auditing and Attestation Testlet Released by AICPA 703 Appendix D: 2014 Released AICPA Questions for Auditing and Attestation 709 INDEX 725 ftoc.indd 5 10/8/2014 9:04:14 PM ftoc.indd 6 10/8/2014 9:04:14 PM vii PREFACE DON’T FORGET TO VISIT OUR WEBSITE AT WWW.WILEY.COM/CPA FOR SUPPLEMENTS AND UPDATES. Passing the CPA exam upon your first attempt is possible! The Wiley CPAexcel Exam Review 2015 Study Guide January: Auditing and Attestation preparation materials provide you with the necessary materials (visit our website at www.wiley.com/cpa for more informa- tion). It’s up to you to add the hard work and commitment. Together we can beat the pass rate on each section of about 50%. All Wiley CPAexcel products are continuously updated to provide you with the most comprehensive and complete knowledge base. Choose your products from the Wiley preparation materials and you can proceed confidently. You can select support materials that are exam-based and user-friendly. You can select products that will help you pass! Remaining current is one of the keys to examination success. Here is a list of what’s new in this edition of the Wiley CPAexcel Exam Review 2015 Study Guide January: Auditing and Attestation text. �� �������������������������������������������������������� Attestation for the Computerized CPA Examination beginning in 2014 �� �������������������������������� �� ������������������������������ �� ����������������������������������������������������������� � �� ��������������������������������������������������������������� including the new clarity standards � �� ����������������������������������������������������������� standards � �� �������������������������������� The objective of this work is to provide you with the knowledge to pass the Auditing and Attestation portion of the Uniform Certified Public Accounting (CPA) Exam. The text is divided up into eight areas of study called modules. Each module contains written text ������������������������������������������������������������������ �������������������������������������������������������������������� ��������������������������������������������������������������� are presented to test your knowledge. We are indebted to the AICPA for permission to reproduce and adapt examination materials from ����������������������������������������������������������������� ���������������������������������������������������������������������� �������������������������������������������������������������� ����������������������������������������������������������������� ������������������������������������������������������������������� ������������������������������������������������������������������ ����������������������������������������������������������������� ���������������������������������������������������������������������� text does not present it. The CPA exam is one of the toughest exams you will ever take. ������������������������������������������������������������������� ������������������������������������������������������������� —Ray Whittington November 2014 fpref.indd 7 10/7/2014 7:47:15 PM fpref.indd 8 10/7/2014 7:47:15 PM 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 con- tinuing 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 CPAs’ Excel- lence 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. flast.indd 9 09-05-2014 10:01:32 flast.indd 10 09-05-2014 10:01:32 1 To maximize the efficiency of your review program, begin by studying (not merely reading) this chapter and the next three chapters of this volume. They have been carefully organized and written to provide you with important information to assist you in successfully completing the Auditing and Attestation section of the CPA exam. Beyond providing a comprehensive outline to help you organize the material tested on the Auditing and Attestation exam, Chapter 1 will assist you in organizing a study program to prepare for the exam. Self- discipline is essential. Chapter 1: Beginning Your CPA Review Program Chapter 2: Examination Grading Chapter 3: Solutions Approach Chapter 4: Taking the Examination Chapter 5: Exam Content Overview 3 17 19 27 31 INTRODUCTION c01.indd 1 10/1/2014 7:45:29 PM c01.indd 2 10/1/2014 7:45:29 PM Chapter 1: Beginning Your CPA Review Program GENERAL COMMENTS ON THE EXAMINATION The Uniform CPA Examination is delivered using computer-based testing (CBT). CBT has several advantages. You may take the exam one section at a time. As a result, your studies can be focused on that one section, improving your chances for success. In addition, the exam is no longer offered twice a year. In addition, you may take the exam on your schedule, eight months of the year, six days a week, and in the morning or in the afternoon. Successful completion of the Auditing and Attestation section is an attainable goal. Keep this point foremost in your mind as you study the first four chapters in this volume and develop your study plan. Purpose of the Examination1 The Uniform CPA Examination is designed to test the entry-level knowledge and skills necessary to protect the public interest. An entry-level CPA is defined as one who has fulfilled the applicable jurisdiction’s educational requirements and has the knowledge and skills typically possessed by a person with up to two years of experience. These knowledge and skills were identified through a Practice Analysis performed in 2008, which served as a basis for the development of the content specifications for the exam beginning in 2014. The CPA examination is one of many screening devices to assure the competence of those licensed to perform the attest function and to render professional accounting services. Other screening devices include educational requirements, ethics examinations, and work experience. The CPA examination appears to test the material covered in accounting programs of the better business schools. It also appears to be based upon the body of knowledge essential for the practice of public accounting and the audit of a medium- sized client. Since the examination is primarily a textbook or academic examination, you should plan on taking it as soon as possible after completing your required education. Examination Content Guidance concerning topical content of the computer-based exam in Auditing and Attestation can be found in a document prepared by the Board of Examiners of the AICPA entitled Content and Skill Specifications for the Uniform CPA Exam. We have included the content outline for Auditing and Attestation at the beginning of Chapter 5. The outline should be used as an indication of the topics’ relative emphasis on the exam. The Board’s objective in preparing this detailed listing of topics tested on the exam is to help “in assuring the continuing validity and reliability of the Uniform CPA Examination.” These outlines are an excellent source of guidance concerning the areas and emphasis to be given each area on future exams. The new Content and Skill Specification Outlines for the CPA examination, including the testing of International Auditing Standards, went into effect January 1, 2014. In addition, the AICPA adopted CBT-e, which is a new computer platform. The major change from your standpoint is that simulations are smaller in size and a larger number of these “task- based simulations” are included on the Auditing and Attestation, Financial Accounting and Reporting, and Regulation exams. In addition, all simulations that test writing skills have been moved to the Business Environment and Concepts exam. New accounting and auditing pronouncements, including those in the governmental and not-for-profit areas, are tested in the testing window starting six months after the pronouncement’s effective date. If early application is permitted, a pronouncement is tested six months after the issuance date; candidates are responsible for the old pronouncement also until it is superseded. Federal laws are tested six months following their effective date. The AICPA posts content changes regularly on its Internet site at www.cpa-exam.org. 1More information may be obtained from the AICPA’s Uniform CPA Examination Candidate Bulletin, which you can find on the AICPA’s website at www.cpa-exam.org. 3 c01.indd 3 10/1/2014 7:45:29 PM

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