NINJA CPA REVIEW®
NINJA Notes 2015
Auditing & Attestation
Table of Contents
The N.I.N.J.A. Framework
I. Engagement Planning 8
II. Internal Control 25
III. Auditing & IT 36
IV. Evidence & Risk 42
V. Audit Reports 56
VI. Audit Sampling 65
VII. Professional Responsibilities 75
VIII. International Auditing 84
2 The N.I.N.J.A. Framework
NAIL THE CONCEPTS
Watch your CPA Review videos first – before working any
assigned homework questions.
The CPA Review industry says to watch a section of CPA
Review video and then work the accompanying MCQs. This
perspective stems from the old-school approach to the paper
and pencil exam where you had to sit in a live classroom and
learn from an instructor on weekends.
Today, there is a smarter way to study. You don’t have to go
to a weekend live course. You can fire up the laptop on a
Tuesday morning and knock out two hours of material
before you even brush your teeth. If you work MCQs in week
one over your week one topic, guess what? You will work
them again in week 5 or 6 when you review because you will
forget what you learned.
If you watch a video in week one and score an 85 on the
corresponding MCQs, will you be able to score an 85 four
weeks later? Not likely. You will need to work them again
anyway and it’s not a smart use of study time.
Instead, let the N.I.N.J.A. Framework guide you.
INTENSE NOTES
Repeat after me: “PUT THE HIGHLIGHTER DOWN.”
Which method do you think will help you learn the material
better – painting printed words in a book with pretty
florescent colors or writing them down on a legal pad and
thinking about the information?
3 Grab a stack of legal pads, put the highlighter down, and
start writing.
Many people have said that instead of taking their own
notes, they just re-write the material inside of this study
guide, which is fine too.
NON-STOP MCQS
Now is the time to start working NINJA MCQ and do them
with a focused frenzy. Do so many MCQs that you’re
absolutely sick of them. As you encounter little “fact
nuggets” that you didn’t know or are prone to forget, write it
down and add it to your voluminous stack of notes.
JUST RE-WRITE IT
This is where it gets tedious. This is also where the payoff
happens. You may be familiar with the fact that if you had a
choice between $3 Million and 1¢ doubled daily for 31 days;
the penny doubled for 31 days ends up tripling the $3
Million. The payoff, however, doesn’t happen until the 31st
day. The road is long, but ends up being worth it in the end.
The same goes for re-writing your study notes. The thought
of grabbing that stack of legal pads and going to town rewriting what you’ve already written may sound like a
ridiculous suggestion at first, but I am a firm believer in its
impact.
Merely writing down your notes and then reviewing them
before your exam doesn’t have near the impact as taking
your furious scribbles and converting them into re-packaged,
easily-digestible “fact nuggets.”
Not only will your notes mean more when you’ve whittled
away the non-essentials, but you are actually learning the
4 material twice. Re-processing the material by re-writing your
notes is like letting the information marinade in your mind.
Just like a well-prepared steak, you will taste the payoff of
this extra step.
Don’t like taking notes? No problem. Re-write these
NINJA Notes instead. You will absorb the material better
vs. reading only.
Plan wisely because this will likely take a week to
complete.
“I have found this to be unbelievably helpful! This is now my
second section that I have followed this piece of advice and,
once again, I am amazed at how much the material "clicks"
as I review and write the notes a second time.
Sure, it's time-consuming, but for me, it is worth it. No
questions asked. Not only does it help with processing and
understanding the material, but it also results in a better,
more organized set of study notes to use for review up until
exam date.” – Sandy
ALL COMES TOGETHER
You have watched the videos. You’ve taken ridiculous notes
and have done hundreds (thousands?) of multiple-choice
questions. You’ve re-written your notes.
Now, study that stack of review Gold in your hands multiple
times, aim for a NINJA MCQ Trending Score of 85%
heading into exam day, study your notes even more, and
then go in and PASS the CPA Exam.
5 How to use NINJA Notes
READING
You've invested in the NINJA Notes, now let it go to battle
for you. You should read them as many times as possible.
Carry it with you wherever you go.
Do you have an iPhone®, iPad®, or similar device(s)?
Simply load the PDF onto the device and if you have 5
minutes of downtime, you have 5 minutes of study
time.
It is recommended that you read the NINJA Notes at least
five times leading up to your final two weeks of exam prep.
If you have 6 weeks to study, then you need to complete
this in 4 weeks. 5 weeks to study, then complete it in 3.
4 weeks = 2 weeks. You get the picture. The point is: plan,
plan, plan and budget, budget, budget, budget because
exam day is looming.
6-Week Plan: Approx. 87 pages x 5 reads /4 weeks
/ 7 days per week = Approx. 16 pages per day
5-Week Plan: Approx. 87 pages x 5 reads /3 weeks
/ 7 days per week = Approx. 21 pages per day
4-Week Plan: Approx. 87 pages x 5 reads /2 weeks
/ 7 days per week = Approx. 31 pages per day
3-Week Plan: Approx. 87 pages x 5 reads /1 weeks
/ 7 days per week = Approx. 62 pages per day
6 RE-WRITING
This step is optional, but it won over a lot of skeptics with its
results. This is not mainstream advice. This is the NINJA
way. The mainstream way of studying for the CPA Exam is
old-fashion and outdated.
Forget the old way. You are a NINJA now.
Now is the time to either
1. Re-write your own CPA Exam notes or
2. Re-Write the NINJA Notes.
Plan on investing a week doing this and you should expect to
get through 15 pages a day (Approx. 103 pages / 7) in order
to stay on track.
NINJA STUDY PLANNER
http://www.another71.com/wp-content/files/AUDNINJAStudyPlanner.zip
7 I. Engagement Planning
THE AUDITOR
! Provides users of financial information with reasonable
assurance that the financial statements as a whole are
o Free from Material Misstatement
" Due to fraud or error
! Expresses an Opinion on the Financial Statements
o They are prepared in accordance with an
Applicable Financial Reporting Framework
" In all Material respects
! NOT responsible for detecting theft or fraud
o Instead, provides reasonable assurance
! The earlier the auditor is hired prior to the Balance
Sheet Date, the better for audit planning and efficiency
o Audit procedures can be carried out at interim
dates if Control Risk for the accounts/transactions
is low
" Review changes in balances at year-end
" If the year has already been closed, an
auditor can take the engagement if they are
able to overcome the limitations of the
engagement
8 ! An auditor uses Professional Skepticism to
o Plan the Scope of the Audit
o Plan the Objectives of the Audit
! When planning an audit
o Role and involvement of client’s Internal Auditors
should be decided
o Analytical procedures performed
" Compare Actual vs. Forecasted Data
o If issues relating to Predecessor Auditor’s work on
previous financial statements come up during the
current audit
" Auditor must have client’s permission to
discuss the issue
o Audit procedures that are carried out by assistants
" Were they adequately performed?
• Review the working papers
" Are the results consistent with the audit
report?
o Audit Strategy should be mapped out
" What are the reporting objectives?
" What is the scope of the audit?
9 GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)
The 10 GAAS Standards are no longer referred to by the
Clarified Audit Standards. However, the principles conveyed
are still important and are foundational to the Standards.
For this reason, they will remain in the NINJA Notes.
! Materiality and Audit Risk are foundations of GAAS
o Measure Auditor’s
" Professional Qualifications & Judgment
General Standards (TIP) Training and ProEiciency • Education and Audit Experience Independence • In Fact and Appearance • Honest • No Direct Financial Interest • No Indirect Material Financial Interest Professional Care • Technical abilities mirror those held by peers in the profession • Follow GAAS Standards • Obtain a Reasonable Level of Assurance • Maintain Reasonable Level of Skepticism • Supervise Audit Staff • Review judgment at every level 10 Standards of Fieldwork (PIE) Planning and Supervision •  Audit should be adequately-­‐planned and the work of any supporting staff should be supervised. Internal Control •  Auditor must understand the entity and its internal control environment. Evidence •  Auditor must obtain sufEicient & appropriate audit evidence. Standards of Reporting (CDOG) Consistency •  Consistency is Implied. Report only refers to consistency if accounting principles have not been consistently applied period-­‐to-­‐period. Disclosures •  Adequacy is Implied. Report only refers to disclosures if disclosures are NOT adequate. Opinion •  Audit Opinion is based on Financial Statements as a whole. GAAP •  Audit Report MUST state whether the Einancial statements have been prepared in accordance with US GAAP. 11 PRIOR TO ACCEPTING AUDIT ENGAGEMENT
! Review client’s Financial Statements
! Appropriate Financial Reporting Framework?
o Auditor must determine if appropriate framework
(GAAP/IFRS) has been used
! Speak to 3rd Parties
! Contact Predecessor Auditor to evaluate whether
engagement should be accepted
o Must Have Permission from Client
" No Permission = No Engagement
o Why the Auditor Change?
o Any Serious Discussions with Audit Committee?
o How is Management Integrity? Disagreements?
o How was Internal Control?
o Understand Industry or Be Willing to Learn
o Consider Scope Limitation
" Limited evidence available = No Engagement
AUDIT ENGAGEMENT AGREEMENT
! Must be written and covers:
o Objectives of Engagement
12 o Limitations of Engagement
o Responsibilities of Management
" Provide Written Assertions
" Appropriate Financial Reporting Framework
" Establishing & Maintaining Internal Control
" Access to Records
" Financial Statements
" Compliance with Laws
o Responsibilities of Auditor
" Limited Error/Fraud responsibility
" Document and remind Management annually
that the terms of the Engagement Agreement
still apply
• Reminder can be Written or Oral
GROUP ENGAGEMENT TEAM & COMPONENT AUDITORS
! Group Engagement Team
o Develop Audit Strategy
o Communicate with Component Auditors
" Establish Materiality threshold
• Must be lower than Group Materiality
13 o Perform work on Consolidation Process
o Evaluate Audit Conclusions
o Must understand work of Component Auditors
o Includes
" Partners
" Group Engagement Partner
" Staff
! Group Engagement Partner
o Responsible for
" Group Audit Engagement
• Direction
• Supervision
• Performance
" Audit Report
! Component Auditor
o Audits one “Component” of the entity
o Significant Component
" Significant due to Financial Materiality?
• Audit the Financial Information
14 " Significant due to Risk of Material
Misstatement?
• Audit Procedures performed
" Documentation showing list of Significant
Components and work performed required
o Non-Significant Component
" Analytical Procedures performed at the
Group Level
AUDIT COMMITTEE
! Part of the Board of Directors
! Corporate Officers Not Allowed
! Responsible for Hiring Auditor
o Oversees Internal Control
o Must Agree with Auditor on
" Responsibility of the Parties
" Audit Fee
" Timing of the Audit
" Audit Plan
15 o Acts as Liaison Between Auditor and the Board
" Auditor Communicates Concerns about
" Internal Control Deficiencies
" Errors
" Fraud
" Illegal Activities
MATERIALITY
! Quantitative and Qualitative Measurements
! Measured on the Transactional or the Financial
Statement level
o Audit plan based on smallest misstatement that
could be material to Financial Statements
o If materiality thresholds differ among Financial
Statements, then use the lowest threshold
amount. DON’T average them.
! Based on Auditor Judgment
o Auditor must consider needs of users
! Audit should be planned to allow “reasonable
assurance” that no material misstatements exist
16 ! As acceptable Materiality level Decreases
o Auditor must find smaller misstatements
" More individual account testing & testing
closer to Balance Sheet Date
AUDIT RISK
! Audit Risk (AR)
o Inherent Risk x Control Risk x Detection Risk
o Risk that material mistakes, errors, omissions, or
fraud will result in an inaccurate audit report
o Based on Auditor Judgment
o Measured both Qualitative and Quantitatively
! Control Risk (CR)
o Will Internal Control detect error or fraud?
o Auditor cannot control CR
! Inherent Risk (IR)
o Which transactions have a higher level of risk?
o Auditor cannot control IR
17 ! Detection Risk (DR)
o Will the auditor fail detect a material
misstatement?
o Auditor CAN control DR
" Do more testing at year-end
" Increase substantive testing
o Less Acceptable DR = Run More Substantive Tests
o More Acceptable DR = Run Less Substantive Tests
o More Substantive Tests = Less Audit Risk
" Detection Risk decreases
" (↓AR = IR x CR x ↓DR)
o Less Substantive Tests = More Audit Risk
" Detection Risk increases
" (↑AR = IR x CR x ↑DR)
! Quantitative Measurements
o Inherent, Control, and Detection Risk can all be
measured in terms of percentages
! Non-Quantitative Measurements
o Inherent, Control, and Detection Risk can all be
measured in terms of acceptable ranges
18 FRAUD AND ILLEGAL ACTS
! Management’s responsibility to FIND and PREVENT
! Auditor’s Responsibility:
o ASSESS THE RISK that such things will lead to
material misstatements.
o Design the audit to provide reasonable assurance
against Material Misstatements caused by
" Fraud
" Illegal acts that directly affect the F/S
" If illegal (and not fraud), auditor should
seek to understand the situation and
whether it affects the Financial
Statements
" Material errors
o Report all management fraud to Audit Committee
" Minor fraud by low-level employees?
• Don’t report to Audit Committee
" Minor fraud by management?
• Report to Audit Committee
o Required Inquiries and Procedures
" Management inquiries
" Analytical Procedures
19 " Discussions with audit personnel about
" Fraud leading to material misstatement
! Fraud is Intentional (Misappropriation)
o Born out of (RIO)
" Rationalization
" Incentive
" Opportunity
! Errors are Unintentional (Misinterpretation)
! Fraud Red Flags
o Current audit procedures may need to be reconsidered if red flags exist.
o Examples of Audit Red Flags:
" Management compensation tied to stock
" Aggressive financial forecasting
" Former auditor disagreed with Management
" Records not available for audit
! A Fraud Risk Factor
o Has been observed in similar situations
" Large sums of cash on hand
" Earnings growth without cash flow
20 o Does NOT necessarily mean that there is a
material weakness in internal control
" Internal control analysis can result in the
conclusion that Internal Control is weak, but
probably won’t identify illegal acts
o Leads to auditor taking action
" Strives to make audit engagement
procedures less patterned and predictable
" Re-evaluates management’s application of
accounting procedures
" Finds and assigns audit personnel with
relevant skills in this area
! Documentation
o Any fraud risks identified that could lead to
material misstatement
o Audit procedures performed to assess risks
o Nature of communication made to audit
committee and company management
o Disclosure to third parties regarding fraud not
normally the auditor’s responsibility
" Fraud by management should normally be
reported to Audit Committee, not SEC
21 ! Litigation and Claims
o Letter of Inquiry
" If Auditor suspects legal proceedings could
contribute to a Material Misstatement, then
they must contact the entity’s external Legal
Counsel
SARBANES-OXLEY ACT OF 2002
! Created the PCAOB
! Designates Officer responsibility for internal control
o Must disclose significant internal control
weaknesses to auditor and audit committee
o Must disclose any level of fraud discovered by
employees with internal control responsibilities
AUTHORITATIVE LITERATURE HIERARCHY
! Statements on Auditing Standards (SAS)
↓
! Auditing Interpretations, AICPA Guides & SOPs
↓
! Industry Articles (no authority)
QUALITY CONTROL FOR CPA FIRMS
! Firm Leadership exhibits quality and leads by example
and sets the tone for the organization
! Firms should Monitor and document that its policies and
procedures are being followed
! Firms should have Relevant Ethical Requirements
22 ! Acceptance and continuance of client engagements
should continue to be evaluated for
o Client Integrity
" Does management have integrity?
o Auditor Competency
" Is the firm competent enough to take the
engagement?
o Legality
! Firm should have Competent and Ethical personnel
! Firm engagements are performed, supervised, and
reviewed in accordance with professional standards and
regulations
COMPILATION SERVICES
! SSARS - Statements on Standards for Accounting and
Review Services to be followed
o Non-Public entities only
! Independence NOT required for Compilations
o No Assurance given
! A CPA should comply with provisions of SSARS that
apply to Compilation Engagements when preparing
unaudited Financial Statements to a non-public
company to a client or third party
! Must understand client industry
23 REVIEW SERVICES
! SSARS - Statements on Standards for Accounting and
Review Services to be followed
o Non-Public entities only
! Provides Negative Assurance
! Independence IS required for Reviews
o Performs Analytical Procedures
o No Material Indirect financial interest allowed
o No Immaterial Direct financial interest allowed
! Must understand client industry
ATTESTATION SERVICES
! Independence Required
! CPA expresses a conclusion about an assertion
o Is the client compliant with laws?
CONSULTING SERVICES
! Independence not required
PROSPECTIVE FINANCIAL STATEMENTS
! Report is restricted to specified users
! Agreed-upon procedures implemented
24 Ready to Pass the CPA Exam (and get your life back)?
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