1.10.19 Flashcards
In which of the following circumstances would a CPA who audits XM Corporation lack independence?
The CPA and XM’s president each owns 25% of FOB Corporation, a closely held company.
Independence is impaired if, during the period of the professional engagement, “a covered member had a joint, closely held investment that was material to the covered member.” A joint, closely held investment by the member and the client (or its officers, directors, or an owner with significant influence) enables them to control the investee entity or property.
A management’s specialist most likely is useful to
Assist the client in preparing the financial statements.
A management’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The work in that field is used by the entity to assist in preparing the financial statements.
When an accountant performs a review of the financial statements of a nonissuer, (s)he
Seeks to establish a reasonable basis for providing limited assurances about the statements.
To obtain a reasonable basis for the expression of limited assurance, the accountant must apply analytical procedures, make inquiries of management and other entity personnel, and obtain written representations from management. Accordingly, the review report states, “Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.”
An auditor is required to attempt communication with the predecessor auditor prior to
Accepting the engagement.
Before final engagement acceptance, the auditor should communicate with the predecessor auditor. A predecessor auditor includes an auditor engaged to audit the client, regardless of whether the audit was performed. Communication should be made only after obtaining the prospective client’s permission, and the auditor should request that the prospective client authorize the predecessor to respond fully to the auditor’s inquiries (AU-C 210).
An auditor would consider a cashier’s job description to contain compatible duties if the cashier receives remittances from the mail room and also prepares the
A daily deposit slip.
Preparing the bank deposit slip is a part of the custodial function, which is the primary responsibility of a cashier. The cashier is an assistant to the CFO and thus performs an asset custody function. The preparation of a bank deposit slip is an integral part of the custodial function, along with the depositing of remittances daily at a local bank.
Under the ethical standards of the profession, which of the following is a “permitted loan” regardless of the date it was obtained?
A secured automobile loan.
Independence is generally impaired if a covered member has loans to or from a client. However, certain exceptions apply. One such exception is for an automobile loan collateralized by the vehicle.
One of the major problems in a computer system is that incompatible functions may be performed by the same individual. One compensating control is the use of
A computer access log.
A computer (console) access log is a record of computer and software usage usually produced by the operating system. Proper monitoring of the log is a compensating control for the lack of segregation of duties. For example, the log should list operator interventions.
Internal control has five components: the control environment, risk assessment, information and communication, monitoring, and control activities. Control activities relevant to an audit may be categorized as policies and procedures that pertain to
Reviewing actual performance.
According to AU-C 315, control activities are the policies and procedures that help ensure that management directives are carried out, for example, that necessary actions are taken to address the risks that threaten the achievement of the entity’s objectives. Control activities, whether automated or manual, that may be relevant to an audit pertain to (1) performance reviews, (2) information processing, (3) physical controls, (4) authorization, and (5) segregation of duties.
In which of the following situations would a covered member’s independence be considered to be impaired?
I. The covered member maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution.
II. The covered member has a direct financial interest in an audit client, but the interest is maintained in a blind trust.
III. The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a capital lease, and the rental income is material to the CPA.
II & III.
When a member leases property to or from a client, independence is not impaired if (1) the lease meets the criteria of an operating lease, (2) the terms and conditions of the agreement compare with those of similar leases, and (3) all amounts are paid in accordance with the lease. However, if the lease meets all the criteria of a capital lease, it impairs a covered member’s independence. The reason is that a capital lease is considered a loan to or from the client. Moreover, independence is impaired if, during the period of the professional engagement, a covered member had (or was committed to acquire) any direct or any material indirect financial interest in the client. When a covered member is a trust beneficiary, the trust is deemed to be a direct financial interest, and the underlying investments are indirect financial interests. However, the beneficiary of a blind trust is also the grantor. The grantor normally can amend or revoke the trust, and the investments will finally revert to him or her. Thus, the blind trust and the investments are deemed to be direct financial interests of the covered member.
Analytical procedures are most appropriate when testing which of the following types of transactions?
Operating expense transactions.
Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts. Income statement accounts represent transactions over a period of time, but balance sheet accounts represent an amount at a moment in time. Thus, operating expense transactions are likely to be more predictable than balance sheet accounts.
Which of the following procedures would an auditor most likely use to identify unusual year-end transactions?
Performing analytical procedures.
Analytical procedures should be applied to identify unusual relationships, items, and transactions.
In which of the following circumstances would an auditor expect to find that an entity implemented automated controls to reduce risks of misstatement?
When transactions are high-volume and recurring.
Automated controls are cost effective when they are applied to high-volume, recurring transactions. For example, credit limit checks on customer orders could be automated to relieve management from evaluating each customer order as it is received.
According to the ethical standards of the profession, which of the following acts is generally prohibited for a member in public practice?
Accepting a commission for recommending a product to an audit client.
The Commissions and Referral Fees Rule prohibits a member in public practice from recommending any product or service to a client when the firm performs (1) an audit or review of financial statements, (2) a compilation of a financial statement that is reasonably expected to be used by a third party if the report does not disclose the CPA’s lack of independence, or (3) an examination of prospective financial information for that client.
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
Reviewing confirmations of loans receivable and payable
An auditor should be alert during the audit for related party information. Thus, the auditor should inspect records and documents, especially (1) bank and legal confirmations, (2) minutes of meetings of shareholders and directors, and (3) any other records or documents considered necessary. Other records and documents may include third-party confirmations.
Which of the following is not a valid concept of internal control?
When one person is responsible for all phases of a transaction, there should be a clear designation of that person’s responsibility.
One person should not be responsible for all phases of a transaction, i.e., for authorization, recording, and custodianship of the related assets. These duties should be performed by separate individuals to reduce the opportunities to allow any person to be in a position to commit and conceal fraud in the normal course of his or her duties.
