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CPA Understanding the entity and its environment

CPA Understanding the entity and its environment

CPA Understanding the entity and its environment : This section covers knowledge of audits of issuer and nonissuer entities, attestation engagements for issuer and nonissue entities, preparation, compilation and review engagements, and the skills needed to apply that knowledge.

Auditing and Attestation: Understanding the Entity and Its Environment

  1. 1. Determine and Document Materiality.
  2. Conduct and Document Risk Assessment Discussions Among Audit Team, Concurrently with Discussion on Susceptibility of the Entity’s Financial Statement to Material Misstatement Due to Fraud.
  3. Consideration of Fraud  Identify characteristics of fraud·  Document required discussions regarding risk of fraud·  Document inquiries of management about fraud·  Identify and assess risks that may result in material misstatements due to fraud·
  4. Perform and Document Risk Assessment Procedures Identify, conduct and document appropriate inquiries of management and others within the· entity Perform appropriate analytical procedures to understand the entity and identify areas of risk·  Obtain information to support inquiries through observation and inspection (including· reading corporate minutes, etc.)
  5. Consider Additional Aspects of the Entity and its Environment, including: Industry, Regulatory and Other External Factors; Strategies and Business Risks; Financial Performance.
  6. Consider Internal Control  Perform procedures to assess the control environment, including consideration of the COSO· framework and identifying entity-level controls  Obtain and document an understanding of business processes and information flows·  Determine the effect of information technology on the effectiveness of an entity’s internal· control  Perform risk assessment procedures to evaluate the design and implementation of internal· controls relevant to an audit of financial statements  Identify key risks associated with general controls in a financial IT environment, including· change management, backup/recovery, and network access (e.g. administrative rights)  Identify key risks associated with application functionality that supports financial transaction· cycles, including: application access control (e.g. administrative access rights); controls over interfaces, integrations, and e-commerce; significant algorithms, reports, validation, edit checks, error handling, etc.  Assess whether the entity has designed controls to mitigate key risks associated with general· controls or application functionality  Identify controls relevant to reliable financial reporting and the period-end financial reporting· process  Consider limitations of internal control·  Consider the effects of service organizations on internal control·  Consider the risk of management override of internal controls·
  7. Document an Understanding of the Entity and its Environment, including Each Component of the Entity’s Internal Control, in Order to Assess Risks
  8. Assess and Document the Risk of Material Misstatements  Identify and document financial statement assertions and formulate audit objectives including· significant financial statement balances, classes of transactions, disclosures, and accounting estimates.
  9. Relate the identified risks to relevant assertions and consider whether the risks could result in· a material misstatement to the financial statements  Assess and document the risk of material misstatement that relates to both financial statement· level and specific assertions  Identify and document conditions and events that may indicate risks of material misstatement·
  10. Identify and Document Significant Risks that Require Special Audit Consideration  Significant recent economic, accounting, or other developments·


CPA Understanding the entity and its environment

CPA Understanding the entity and its environment :  The Auditing & Attestation (AUD) section of the CPA Exam covers the entire auditing process, including auditing procedures, generally accepted auditing standards, standards related to attest engagements and the AICPA Code of Professional Conduct. It’s important to remember that the AUD exam tests on how well a CPA candidate applies their audit and attestation knowledge when solving problems and performing specific Blueprint tasks, not how well they are able to memorize auditing concepts.

CPA Understanding the entity and its environment

CPA Understanding the entity and its environment : 

15-25% Ethics, Professional Responsibilities and General Principles

  • Nature and Scope of Audit and Non-Audit Engagements
  • Ethics, Independence and Professional Conduct
  • Terms of Engagement for Audit and Non-Audit Engagements
  • Requirements for Engagements Documentation
  • Communication with Management and Those Charged with Governance
  • Communication with Component Auditors and Parties Other Than Management and Those Charge with Governance
  •  A Firm’s System of Quality Control, Including Quality Control at the Engagement Level

20-30% Assessing Risk and Developing a Planned Process

  • Planning an Engagement
  • Understanding an Entity and Its Environment
  • Understanding an Entity’s Internal Control
  • Assessing Risks Due to Fraud
  • Identifying and Assessing the Risk of Material Misstatement and Planning Further Procedures Responsive to Identified Risks
  • Materiality
  • Planning for and using the Work of Others, Including Group Audits, the Internal Audit Function and the Work of a Specialist
  • Specific Areas of Audit Risk

30-40% Performing Further Procedures and Obtaining Evidence

  • Understanding Sufficient Appropriate Audit Evidence
  • Sampling Techniques
  • Performing Specific Procedures to Obtain Evidence
  • Specific Matters that Require Individual Attention
  • Misstatements and Internal Control Deficiencies
  • Written Representations
  • Subsequent Events and Subsequently Discovered Facts

15-25% Forming Conclusions and Reporting

  • Reports On Auditing Engagements
  • Reports On Attestation Engagements
  • Accounting and Review Service Engagements
  • Reporting On Compliance
  • Other Reporting Considerations

70-76% Auditing Engagements and Standards

  • Engagement Acceptance and Understanding
  • Understanding the Entity, its Context, and its Internal Control
  • Audit Procedures and Evidence Evaluation
  • Audit Reports and Opinions

16-20% Professional Responsibilities

  • Ethics
  • Independence

12-16% Accounting & Review Services

  • Engagement Planning
  • Evidence
  • Reports

CPA Understanding the entity and its environment

CPA Understanding the entity and its environment : 

The AUD Exam is 4 hours long, though the candidate is not required to use all the allotted time, and consists of 72 Multiple Choice Questions (MCQs) and 8 Task-Based Simulations (TBSs).

Of the 72 MCQs, 60 are operational, meaning they count toward the exam score, while 12 are pretested and do not count toward the exam score. Of the 8 TBSs, 7 are operational and 1 pretested. Other than scoring, there is no functional difference between operational and pretested questions and no sure way for the candidate to tell the difference between an operational and pretested question.

The AUD Exam is organized into five testlets – two 36-question MCQ testlets followed by a 2-question TBS testlet, then an optional 15-minute break that does not count against the 4-hour test time, then two additional TBS testlets of three questions each. Once a testlet has been submitted, it cannot be revisited.

CPA Understanding the entity and its environment

CPA Understanding the entity and its environment : 

The operational MCQs count 50% toward a candidate’s exam score. The operational TBSs count 50% toward a candidate’s exam score.

By default the first MCQ testlet is of ‘Medium’ difficulty. The difficulty level of the next MCQ testlet depends on the candidate’s performance on the first testlet. The candidate will therefore experience one of the following MCQ testlet difficulty sequences:

  • Medium – Difficult (candidate performed well on first testlet)
  • Medium – Medium (candidate did not perform well on first testlet)

Characterizing a testlet as ‘medium’ or ‘difficult’ refers to the average difficulty of the questions in an MCQ testlet. There is not a binary ‘medium’ or ‘difficult’ value assigned to each MCQ. Rather, the difficulty level of each question exists on a numeric scale.

Credit awarded for MCQs is weighted by difficulty level, meaning more credit is awarded for getting a more difficult question correct than for getting a less difficult question correct. Therefore, a candidate with a difficult testlet is not penalized for having harder questions, nor is there any advantage in having two Medium testlets.

It is still possible to pass the exam even with a Medium-Medium MCQ testlet sequence. In these cases, good-to-excellent performance on the second MCQ testlet and the TBS testlets is key to passing.

The assigned TBS testlets are pre-selected and have nothing to do with the candidate’s performance on the preceding MCQ testlets, nor do the TBSs within the TBS testlet proceed according to performance on the previous TBS.

While an MCQ is either right or wrong, there appears to be partial credit awarded for non-Research TBSs. Research TBSs are graded as either right or wrong with no partial credit awarded.

CPA Understanding the entity and its environment

The Examination consists of four sections:

Auditing and Attestation (AUD)

This section covers knowledge of audits of issuer and nonissuer entities, attestation engagements for issuer and nonissuer entities, preparation, compilation and review engagements, and the skills needed to apply that knowledge.

Business Environment and Concepts (BEC)

This section covers knowledge of general business environment and business concepts that candidates need to know in order to perform audit, attest, accounting and review services, financial reporting, tax preparation, and other professional responsibilities in their role as certified public accountants, and the skills needed to apply that knowledge.

Financial Accounting and Reporting (FAR)

This section covers knowledge of generally accepted accounting principles for business enterprises (public and nonpublic), not-for-profit entities, and state and local government entities, and the skills needed to apply that knowledge.

Regulation (REG)

This section covers knowledge of federal taxation, ethics and professional responsibilities related to tax practice, and business law, and the skills needed to apply that knowledge.

CPA Understanding the entity and its environment

Eligible candidates have the opportunity to take the Examination at Prometric test centers in Bahrain, Kuwait, Japan, Lebanon, and the United Arab Emirates (UAE) and Brazil. In order to qualify to take the  Examination outside the U.S., candidates will have to first establish their eligibility through application to a state board participating in the International CPA Examination Administration Program.

For specific instructions on how to apply to take the Examination, please visit the CPA Examination section of the NASBA website.

CPA Understanding the entity and its environment

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