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All CPA AUD Formulas
Ethics, Professional Responsibilities and General Principles
7 items
Independence: financial interest threshold
Direct financial interest of ANY amount impairs independence.
Indirect financial interest: impairs independence only if material to the covered member.
Covered member = professional on engagement team, firm, or network firm.
Permitted vs prohibited nonattest services for audit clients
Permitted (with safeguards): bookkeeping (non-issuer), payroll, tax compliance, advisory. Prohibited for issuers (SOX §201): bookkeeping, management functions, FIS design/implementation, internal audit outsourcing, broker-dealer, legal, expert witness.
AICPA Threats and Safeguards framework
Threats (7): Adverse Interest, Advocacy, Familiarity, Mgmt Participation, Self-Interest, Self-Review, Undue Influence. Safeguards: profession/legislation, client, firm, remove from engagement, refuse engagement. If threats > safeguards → not independent.
Engagement letter required content
Required: 1) Objectives + scope 2) Auditor + management responsibilities 3) Inherent limitations (material misstatements may go undetected) 4) Applicable reporting framework 5) Form/content of report 6) Laws referenced 7) Fees/billing 8) Period covered. Signed by both parties.
PCAOB inspection authority (issuer audits)
PCAOB inspects registered firms auditing issuers: 1) Annual if >100 issuer audits/yr 2) Triennial if ≤100 3) Reports deficiencies; firm may request re-review 4) Authority from SOX 2002; SEC oversees PCAOB.
Quality control elements (SQCS 8 — HR-PMA-MSC mnemonic)
Six elements: 1) HR: Human Resources 2) P: engagement Performance 3) M: Monitoring 4) A: Acceptance & continuance of clients 5) MSC: Mgmt responsibilities (leadership/tone) 6) E: Ethics & independence. Mnemonic: HELP-ME or HR-PMA-MSC.
AICPA Code — covered member independence categories
Covered members: 1) engagement team; 2) those who can influence the engagement; 3) partners in lead partner's office; 4) the firm; 5) partners/managers providing ≥10 hrs nonattest services to the client.
Assessing Risk and Developing a Planned Response
13 items
Detection risk (solved)
Higher IR or CR → lower acceptable DR → more or better substantive procedures required.
Materiality benchmarks (planning)
0.5–1% of revenues or assets
5–10% of pre-tax NI
1–2% of equity
Smaller entities: 2–5% of gross profit or 0.5% of assets.
Risk of material misstatement (RMM)
Assessed at financial statement level and assertion level.
Higher RMM → more responsive substantive procedures (nature, timing, extent).
Risk assessment procedures (RAP)
Required for ALL audits to identify risks (NOT to obtain audit evidence): 1) Inquiry of management + others; 2) Analytical procedures (preliminary); 3) Observation + Inspection. Mnemonic: IAO.
Audit Risk model (AR = IR × CR × DR)
; solve
AR = audit risk (set low, e.g. 5%), IR = inherent risk, CR = control risk, DR = detection risk (only auditor-controlled lever via substantive procedures).
Going concern evaluation (auditor's responsibility, ASC 205-40)
Steps: 1) Evaluate conditions/events for substantial doubt about ability to continue 1 yr from F/S issue date. 2) Consider management's mitigation plans. 3) If doubt remains: require disclosure + add emphasis-of-matter paragraph (qualified/adverse if disclosure inadequate).
Management's assertions about transactions vs balances vs presentation
Transactions: OCCAC (Occurrence, Completeness, Cutoff, Accuracy, Classification). Balances: ECRV (Existence, Completeness, Rights/obligations, Valuation). Presentation/Disclosure: OCCA (Occurrence+R&O, Completeness, Classification, Accuracy+Valuation).
Performance materiality vs clearly trivial threshold
; . OM = overall materiality, PM = performance materiality (account-level buffer for aggregation risk), CTT = clearly trivial threshold (misstatements below are not accumulated).
COSO Internal Control framework — 5 components (CRIME)
CRIME: 1) Control environment 2) Risk assessment 3) Information & communication 4) Monitoring 5) Existing control activities. COSO 2013 adds 17 underlying principles mapped across the 5 components.
Significant risks — characteristics + audit response
Indicators: 1) Complexity 2) Fraud potential 3) Related-party txns 4) Subjective estimates 5) Nonroutine txns. Response: substantive procedures REQUIRED, no reliance on controls alone, regardless of control test results (AU-C 315/330).
Fraud risk — types + auditor's response
Fraud types: 1) Misappropriation of assets 2) Fraudulent financial reporting. Response: a) team discussion b) inquire mgmt/audit committee c) presume revenue recognition fraud risk d) test mgmt override of controls. AU-C 240.
Materiality — overall vs performance vs tolerable
1) Overall = 0.5-1% revenue, 5-10% pretax NI, or 1-2% total assets 2) Performance = 50-75% × Overall (buffer for aggregation) 3) Tolerable Misstatement = subset of Performance, applied to specific account/balance
Specialist (auditor's expert vs management's expert)
Both: evaluate competence, capabilities, objectivity. 1) Auditor's expert (AU-C 620): + evaluate scope & adequacy of assumptions/methods/data. 2) Management's expert (AU-C 500): + evaluate work performed & whether reliable as audit evidence.
Performing Further Procedures and Obtaining Evidence
17 items
Attribute sampling: sample size formula
= reliability factor (from table based on confidence level and expected deviations), = tolerable deviation rate, = expected population deviation rate.
Reliability factors (attribute sampling)
95% conf: 0 dev → R=3.0; 1 dev → R=4.75.
90% conf: 0 dev → R=2.31; 1 dev → R=3.89.
Higher conf → larger R → larger sample.
Upper deviation rate (attribute sampling)
From reliability factor table at desired confidence level given actual deviations found.
If UDR > TDR, internal control cannot be relied upon; increase substantive testing.
Accounts receivable turnover and DSO
Analytical procedure; deviations signal potential misstatement.
Reperformance vs reliance on internal controls
1) Reperformance: auditor independently re-executes a control/procedure (e.g., recompute payroll), high-quality evidence. 2) Reliance on Controls: test operating effectiveness; if effective, reduce substantive testing extent/timing.
Sufficient appropriate audit evidence
Sufficiency (quantity) × Appropriateness (quality): both required. 1) Sufficiency ↑ as RMM ↑ or evidence quality ↓ 2) Appropriateness = Relevance + Reliability 3) More evidence cannot offset poor quality 4) Professional judgment; document in workpapers (AU-C 500).
Variables (PPS / classical) sampling
PPS:
RF=reliability factor, TM=tolerable misstmt, EM=expected, EF=expansion. Tests overstatement only. Classical variables: stratify + mean/SD; tests both directions.
Reliability hierarchy of audit evidence
Most → least reliable: 1) Auditor direct (observation, recalculation); 2) External independent (bank confirms, attorney letters); 3) Internal corroborated externally (signed contracts); 4) Internal w/ strong ICFR; 5) Internal w/ weak ICFR; 6) Inquiry alone.
Audit Data Analytics (ADA) — techniques
ADA = analyze patterns + flag anomalies in full populations. Uses: 1) Benford's Law on JEs 2) revenue cut-off 3) AR aging 4) 3-way match (PO/receiver/invoice) 5) duplicate vendors. Supplements (not replaces) traditional procedures; AICPA Audit Data Standards govern.
Subsequent events procedures (Type I + II)
Period: B/S date → report date. Procedures: 1) Read minutes; 2) Read interim F/S; 3) Inquire mgmt re: new commitments/events; 4) Obtain rep letter; 5) Review legal letter. Type I (existed at B/S): adjust F/S. Type II (arose after): disclose only. Dual-date = responsibility limited to specific event.
Going concern audit response — assessment + report modification
GC steps: 1) Evaluate mgmt's mitigation plans 2) Assess disclosure adequacy. Adequate → unmodified + emphasis-of-matter (GC) paragraph. Inadequate → qualified or adverse. Mgmt refuses GC para → consider withdrawal. PCAOB: disclose as CAM.
CAATs (Computer-Assisted Audit Techniques)
CAAT types: 1) Generalized audit software (ACL, IDEA): query/analyze client data 2) Custom audit programs 3) Integrated test facility (ITF): dummy entity processed live 4) Parallel simulation: auditor's program reruns client data. Enables 100% population testing + journal-entry fraud testing.
Test of controls vs substantive procedures
ToC: test operating effectiveness (frequency/consistency), only if relying on controls. Substantive: tests of details + analytical procedures at assertion level. Substantive ALWAYS required for significant risks regardless of ToC.
Attribute sampling — control deviation rate components
Components: 1) TDR = max deviation rate auditor accepts to rely on control 2) EPDR = expected rate based on prior yrs/risk 3) Sample size = f(reliability factor, TDR − EPDR). Sample size ↑ as TDR ↓ or EPDR ↑.
Direction of audit testing — completeness vs occurrence
Completeness: trace source docs → records (e.g., shipping docs → sales journal; catches understatement). Occurrence: vouch records → source docs (e.g., recorded sales → shipping docs; catches overstatement). Direction = which error you catch.
Confirmations — positive vs negative
POSITIVE: respondent MUST reply (agree or disagree), higher quality, use for high-risk/large balances. NEGATIVE: reply only if disagrees, lower quality, use ONLY when (1) low risk, (2) many small balances, (3) low expected exception rate. AU-C 505.
Substantive analytical procedures (SAP)
Steps: 1) Develop expectation from plausible relationships 2) Set tolerable difference 3) Compare to recorded amount 4) Investigate variances > threshold. Required at planning + final review; effective when relationships are stable/predictable (e.g., interest, payroll).
Forming Conclusions and Reporting
6 items
Audit opinion thresholds
Unmodified: no material misstatement, full scope.
Qualified: material but not pervasive OR scope limit.
Adverse: material AND pervasive (GAAP violation).
Disclaimer: scope limit too severe, no opinion.
Going concern paragraph — issuer vs nonissuer
1) Issuer (PCAOB): Explanatory paragraph titled "Substantial Doubt About the Company's Ability to Continue as a Going Concern", placed AFTER opinion. 2) Nonissuer (AICPA AU-C 570): Emphasis-of-Matter paragraph, same concept, after opinion.
Critical Audit Matters (CAMs) — PCAOB AS 3101
CAM (issuer audits only) = matter (1) communicated to audit committee, (2) related to material accounts/disclosures, AND (3) involving especially challenging/subjective/complex auditor judgment. Report each CAM: identify, why CAM, how addressed, FS accounts affected.
Audit report opinion ladder (5 outcomes)
1) Unmodified: fair per framework; 2) Unmodified + EoM/OM: clean + emphasis para (GC, framework change); 3) Qualified: material, not pervasive; 4) Adverse: material AND pervasive misstatement; 5) Disclaimer: scope limit material AND pervasive.
SSARS — preparation, compilation, review (no opinion)
SSARS engagements (no audit, no opinion): 1) Preparation (AR-C 70): no assurance, no report, independence not required. 2) Compilation (AR-C 80): no assurance, report issued, lack of independence OK if disclosed. 3) Review (AR-C 90): limited assurance, written report, independence required.
Single Audit (Uniform Guidance / 2 CFR 200)
Trigger: nonfederal entity expends $750K federal funds/yr. Components: (1) F/S audit; (2) major-program compliance + ICOC audit (risk-based selection). Reports: F/S opinion + Schedule of Federal Awards + compliance opinion + IC report.
