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NINJA A REVIEW®

NINJA Notes Auditing & Attestation 2018 January 2018 – June 2018 Exams

The 2018 A Exam (Source: AIA)



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The 2018 AUD Exam (Source: AIA)



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Table of Contents The N.I.N.J.A. Framework I. Engagement Planning 12 II. Internal Control 30 III. Auditing & IT 40 IV. Evidence & Risk 47 V. Audit Reports 62 VI. Audit Sampling 72 VII. Professional Responsibilities 82 VIII. International Auditing 90



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The N.I.N.J.A. Framework NAIL THE CONCEPTS Watch your A Review videos first – before working any assigned homework questions. The A Review industry says to watch a section of A 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?



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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

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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 the A Exam.



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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



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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 A 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 A 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.



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II. Internal Control WHAT IS INTERNAL CONTROL? Ø Internal Control provides reasonable assurance that Ø Material Misstatements will be prevented Ø Reliability & Integrity of Financial Statements will be preserved Ø Assets are protected against misuse Ø Examination of Internal Control by management required under Sarbanes-Oxley o CEO/CFO must disclose deficiencies o Management must assess Internal Controls o Management must certify Financial Statements Ø Has Inverse relationship with Substantive Testing o Stronger Internal Controls = Less Testing Needed o Weaker Internal Controls = More Testing Needed



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THREE OBJECTIVES OF INTERNAL CONTROL Reliability of Financial Reporting Operational Efficiency/Effectiveness Compliance with Law and Regulations

FIVE COMPONENTS OF INTERNAL CONTROL Control Environment Risk Assessment Control Activities Information and Communication Monitoring

CONTROL ENVIRONMENT ASSESSMENT Ø Sets tone for the entire company Ø How is Management Integrity/Ethics? Ø Is Management Competent? Ø Healthy Organizational Structure? Ø Appropriate HR Policies?



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Ø Authority/Responsibility Assignments? Ø What is Managements’ Style? Ø Riskier with a dominant, aggressive individual(s) Ø Are the Board/Audit Committee Actively Involved? RISK ASSESSMENT Ø Risk of Material Misstatement determines acceptable level of Detection Risk o Detection Risk determines Nature, Timing, Extent of Auditing Procedures Ø Rapid Growth? o Risky Ø How does Management o Identify Risk? o Estimate Significance? Ø Any Major Changes to … ? o Operations o Personnel o Systems o IT o Products

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o Corporate Organization o Foreign Ops Ø When Control Risk is assessed to be at Maximum o No Internal Control testing is performed Ø When Control Risk is below Maximum o Auditor tests Internal Controls o Auditor evaluates Control Risk based on tests o Auditor adjusts substantive tests accordingly § Weaker Internal Control = More testing § Stronger Internal Control = Less testing CONTROL ACTIVITIES Ø Performance Reviews Ø Information Processing Ø Physical Controls Ø Segregation of Duties INFORMATION AND COMMUNICATION Ø Auditor needs to understand o Major transaction classes o Transaction initiation



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o records/documents o Transaction processing o Financial Statement Internal Reporting process o Financial Statement External Reporting process Ø Auditor must Document understanding of Internal Control via Memos, Flowcharts (easy to follow) and Questionnaires (easy to complete) Ø Understanding Internal Control allows the auditor to determine o Nature, Timing, and Extent of planned Audit Procedures o Risk of Material Misstatement § Were all transactions recorded? § Were they recorded timely? § Measured appropriately? § Recorded in the correct period? § Presented and disclosed properly? § Did Management communicate their responsibilities?



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TESTING INTERNAL CONTROLS Ø Auditor needs Reasonable Assurance that controls are functioning as designed and effective Ø Internal Control Testing should be strong as (IRON) so that nothing gets past them o Inquiry – Interview company personnel o Re-performance – Can it be replicated? o Observation – Watch the control be applied o INspection – Dig into the details/documents Ø If results are as expected, substantive procedures do not need to be adjusted Ø Controls tested by auditor in prior year can be used in current year if they are re-tested every 3rd year o Exception: Control has changed since audit Ø If Internal Controls are deficient o Control Risk increases o Scope of Substantive Procedures increases o Detection Risk decreases o Material Weakness § Reasonable possibility (more than a remote chance) that a material misstatement in Financial Statement would not be found



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Controls Reliable

Controls NOT Reliable

Control Risk = Lower

Control Risk = Higher

Acceptable Detection Risk = Higher

Acceptable Detection Risk = Lower

Continue substantive procedures for audit engagement as planned

Stop testing controls and do more substantive audit procedures

Ø Tracing o Tests Completeness o Starts with source document and traces forward to the journal entry Ø Vouching o Tests Existence o Starts with journal entry and searches for a voucher or source document to the entry.



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Ø Tracing vs. Vouching and keeping it straight o Think both T before V and C before E in alphabet § Tracing = Completeness § Vouching = Existence SEGREGATION OF DUTIES Ø Non-compatible duties Ø Authorization of asset disbursement Ø Recording of Assets Ø Custody of assets Ø If ing audit evidence doesn’t exist o Use Observation and Inquiry Ø ing should be segregated from Production Ø Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKS o Tip – this as an underlying theme with Segregation of Duties – authority to make a payment should not also lie in the hands of those creating invoices/vouchers. Why? People commit fraud by setting up fake companies and basically paying themselves



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Ø Employees who have custody of assets should not also RECORD those assets o Someone in charge of petty cash should not also control the petty cash records Ø Treasury Department (custodians) should NOT have record keeping duties o They control assets and should not be able to adjust any recording of those assets CONTROL LIMITATIONS Ø Controls can’t stop collusion or bad judgment Ø Management can override controls Ø Cost vs. Benefit relationship of Internal Control REPORTING CONTROL DEFICIENCIES Ø Audit Report - Report on Internal Control o Now Required (SAS 130 – Q1 2017) USING WORK OF THIRD PARTIES Ø Are they Competent? Ø Are they Objective? Ø Internal Auditors should fit this description o On the A Exam, watch who they report to § Audit Committee? More objective



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§ More reliance § Manager? Less Objective § Less reliance Ø Auditor needs to understand the role of Internal Auditors within the organization because their work affects the audit plan Ø Responsibility for judgments about materiality or appropriateness of entries or estimates cannot be shared with third parties like Internal Auditors Ø Internal Auditors should be asked to do some of the legwork like preparing schedules or running reports o They should not be asked to make any decisions or judgments



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