10.1 Flashcards
At the completion of an audit, which of the following entities has ownership of the audit working papers?
The CPA firm that performed the audit.
Audit documentation is the property of the auditor, that is, the CPA firm that performed the audit. This right is explicitly recognized in some state statutes and the AICPA’s Code of Professional Conduct (Acts Discreditable Rule). The Code states that a member is not required to provide such information (working papers) to the client. But state or federal law or a contract may impose other requirements.
The objective of tests of details of transactions performed as substantive procedures is to
Detect material misstatements at the relevant assertion level.
Substantive procedures are (1) tests of the details of transaction classes, balances, and disclosures and (2) substantive analytical procedures. They are performed to detect material misstatements at the relevant assertion level. The auditor performs substantive procedures as a response to the related assessment of the RMMs (AU-C 330).
A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about
Suspense debits that management believes will benefit future operations.
Although the auditor must evaluate relevant assertions about all accounts, the greatest risks are overstated assets and understated liabilities. The unverified suspense debits represent assets that may not exist.
Which of the following types of evidence generally is the most reliable?
Confirmation of account information from third parties.
Audit evidence should be sufficient and appropriate. Appropriate evidence is reliable and relevant. Ordinarily, evidence obtained from independent sources (e.g., from external confirmation of account information) is usually reliable (AU-C 500).
In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence?
A factor for an auditor to consider when designing confirmation requests is the assertion being tested.
The following factors affecting the design of the external confirmation request directly relate to the response rate and the reliability of the evidence obtained: (1) the assertions addressed; (2) specific RMMs, including fraud risks; (3) presentation of the request and method of communication; (4) management’s authorization to confirming parties; (5) prior experience on the audit; and (6) ability of the confirming parties to confirm or provide the information.
The auditor is required to retain audit documentation
For a period to satisfy applicable legal or regulatory requirements.
AICPA standards require the auditor to retain audit documentation for a period sufficient to meet the needs of his or her practice and to satisfy any applicable legal or regulatory requirements, but not less than 5 years. The PCAOB’s AS 1215, Audit Documentation, implements the requirement of the Sarbanes-Oxley Act of 2002 that registered public accounting firms, when performing engagements under PCAOB standards, retain audit documentation for 7 years from the audit report release date.
An auditor ordinarily uses a working trial balance resembling the financial statements without notes, but containing columns for
Reclassifications and adjustments.
The audit process begins with the balances from the ledger recorded on a working trial balance, which is a vehicle for controlling preparation of other audit documentation and summarizing data. As the audit proceeds, material reclassifications and adjustments are documented in the working papers and recorded on the working trial balance. Reclassifications relate to proper presentation of accurate balances, for example, the transfer of a noncurrent payable due in the next period to a current liability account. Adjustments correct client misstatements and affect balances to be reported.
In determining whether transactions have been recorded, the direction of the audit testing should begin from the
Original Source documents.
Determining whether transactions have been recorded is a test of the completeness assertion. Thus, beginning with the original source documents and tracing the transactions to the appropriate accounting records determines whether they were recorded.
What is the maximum number of days in which a nonissuer’s auditor should complete the assembly of the final audit file following the report release date?
60 days.
In accordance with AICPA standards applicable to audits of nonissuers (AU-C 230), the auditor should complete the assembly of the final audit file within 60 days after the report release date (documentation completion date).
To test for unsupported entries in the ledger, the direction of audit testing should be from the
Ledger entries.
To discover unsupported entries in the ledger, a sample of entries should be selected to determine whether any entry lacks proper support. The direction of testing is from the ledger entries to the books of original entry, then to the source documents.
The most reliable forms of documentary evidence are those documents that are
Authorized by a responsible official.
Documents generated externally by independent sources are more reliable than those produced by the auditee. However, the reliability of internal evidence is enhanced if it is subject to effective control. Accordingly, authorization by an appropriate party lends credibility to a document because it increases the probability that the underlying transaction is valid.
Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique?
It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place.
Observation consists of looking at a process or procedure being performed by others. It provides audit evidence about the process or procedure but is limited to that moment in time by the fact that the act of being observed may affect how the process or procedure is performed.
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
The auditor cannot infer that all nonrespondents have verified their account information.
A failure to reply is assumed to indicate the debtor’s agreement when negative confirmations are used. Thus, no auditor follow-up occurs, and no explicit evidence is provided that the intended parties received their requests and verified the information. Thus, unreturned negative confirmation requests rarely provide significant evidence about assertions other than existence. Positive confirmations require a reply, whether or not the debtor agrees with the balance. Alternative procedures are applied to the nonresponses to obtain the evidence necessary to reduce audit risk to an acceptable level (AU-C 505).
Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?
When the combined assessment of inherent and control risk over the sale is high.
The assessed risk of material misstatement (RMM) is the combined assessment of inherent and control risk. If the entity has entered into an unusual or complex transaction, and the assessed RMM is high, the auditor should consider confirming the terms of the transaction with the third parties in addition to examining documents.
A retailing entity uses the Internet to execute and record its purchase transactions. The entity’s auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would
Perform tests several times during the year, rather than only at year end.
Accounting records and other evidence may be available only in electronic form. For example, when the Internet is used, transactions often occur by exchange of electronic messages instead of source documents. Electronic evidence may exist at a given moment in time, but it may not be retrievable after a specified period if files are changed and no backups exist. Consequently, the auditor should consider requesting retention of some information or performing procedures when information is available (AU-C 500). For example, the auditor may change the timing of audit procedures by performing them several times during the year instead of only at year end.
