Accounting 4632 Midterm Exam 2 Study Guide Professor s Instructions Regarding Exam Preparation The following study guide was prepared with the intention of directing students attention toward many of the important concepts covered in the course that they should know I caution students that it is not an exhaustive list However students can expect that the vast majority of exam questions will relate to the issues referenced in this study guide The study guide was prepared in reference to the textbook as the course structure tends to follow the textbook All Topics That Are Considered Fair Game Material covered from slides and lectures Practice problems from class and posted to BB Information from announcements on BB Important Notes Take caution against trying to memorize lists of items from the slides The course is highly conceptual and there should be more focus on why the auditor is required to or should perform various activities Rather than memorizing always seek to identify the structure underlying the concepts Author s Note Round 2 people Hopefully those who utilized my first study guide found it beneficial The tests are wordy and can be tricky so comprehensive knowledge and understanding of the material is paramount Study well in advance and give yourself time to absorb it all Let me say again Seriously try not to memorize this Anything in red print like this is my own additional information to help make some concepts more concrete If you re like me you didn t pay attention in class because it sucked so hopefully these notes will help In most instances you can figure out the right answer by accepting a simple fact everything an auditor does during an audit is done in order to not get sued An auditor is covering his her own ass the ENTIRE TIME A lot of the material is tedious but put some effort in and you ll be fine Good luck on the exam Oh yeah Please pay for this and don t give it to get it from your friends This crap took forever and if you don t wanna pay for it do it yourself In case you want to buy the first one I m reducing the price to 6 50 because for some reason I can t go lower than that I only get a portion of that so don t be a dick MGP Chapter 2 Lessons 7 8 1 Be familiar with the 5 different business processes and the general types of activities that would be involved in each The five categories that characterize the processes of most businesses are the financing process the purchasing process the human resource management process the inventory management process and the revenue process Each process involves a variety of important transactions i Financing Process businesses obtain capital through borrowing or soliciting investments from owners and typically invest in assets such as land buildings and equipment in accordance with their strategies Businesses must also repay lenders and provide a return on owner investments ii iii iv v Purchasing Process Businesses must acquire goods and services to support their operations Human Resource Management Process Business organizations hire personnel to perform various functions in accordance with the enterprise s mission and strategy Inventory Management Process This process varies widely between different types of businesses that often have significant numerous and often complex transactions belonging to the inventory management process While purchasing of finished goods or raw materials inventories is included in the PURCHASING process the inventory management process for a manufacturer includes the cost accounting transactions to accumulate and allocate cost to inventory Revenue Process businesses generate revenue through sales of goods or services to customers and collect the proceeds of those sales in chase either immediately or through collections on receivables Management engages in the five business processes discussed above to implement the organization s strategies and achieve its objectives Management then identifies risk possible threats to achievement of its objectives and ensures that the system of internal control mitigates that risk to acceptable levels Financial statements represent an important output to the entity s efforts to measure the organization s performance and an important form of external reporting and accountability MGP Chapter 3 all 2 Know the types of factors that a CPA firm should consider when evaluating a prospective client Procedures for Evaluating a Prospective Client Inquire third parties regarding integrity of client its management 1 Obtain and review financial information 2 3 Communicate with predecessor auditor 4 Consider special circumstances that represent unusual business or audit risks 5 Determine if the firm is independent of the client 6 Determine if the firm has necessary technical skills and knowledge 7 Determine if acceptance violates any regulations 3 Know the types of inquiries that a potential successor auditor would make of a predecessor auditor When the prospective client has previously been audited the successor auditor makes certain inquiries of the predecessor auditor before accepting the engagement The successor auditor should request permission of the prospective client before making contact with the predecessor auditor The successor auditor should make the following inquiries of the predecessor auditor Info that might bear on the integrity of management Disagreements with management about accounting policies auditing procedures or other similarly significant matters Communications to those charged with governance regarding o o fraud and noncompliance significant deficiencies and material weaknesses in internal control The predecessor auditor s understanding about the reasons for the change of auditors 4 Understand the role of the engagement letter and the issues that would be discussed in an engagement letter An engagement letter is used to formalize the arrangements reached between the auditor and the client This letter serves as a contract outlining the responsibilities of both parties and preventing misunderstandings between the two parties May also include Arrangements involving the use of specialists or internal auditors Limitation of liability Additional services to be provided Arrangements regarding other services e g assurance tax or consulting services 5 Know what issues need to be considered in order to use the work of internal auditors When the client has internal auditors the auditor may request their assistance in conducting the audit The