1.12.18 Flashcards
The profession’s ethical standards most likely are violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the
Actual fee would be substantially higher.
The Code prohibits forms of solicitation that are false, misleading, or deceptive. A representation that specific services will be performed for a stated fee, when it is likely at the time that the actual fee will be substantially higher, is a prohibited form of solicitation.
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
Determining the extent of involvement of the client’s internal auditors.
AU-C 610, The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements, states that the independent auditor should obtain an understanding of the internal audit function when obtaining an understanding of a client’s internal control. The understanding should be sufficient to identify internal audit activities relevant to audit planning. Thus, an internal audit function is one of many factors to be considered in determining the nature, timing, and extent of audit procedures.
Which of the following would an auditor most likely consider in evaluating the control environment of an audit client?
Management’s operating style.
The control environment is the foundation for the other components of internal control. It provides discipline and structure and sets the tone of the organization. The evaluation of the design of the control environment includes such factors as management’s philosophy and operating style. They relate to management’s approach to taking and managing business risks. They also relate to management’s attitudes and actions toward (1) financial reporting, (2) information processing, (3) accounting functions, and (4) personnel.
In obtaining an understanding of controls that are relevant to audit planning, an auditor is required to obtain knowledge about the
Design of the controls included in the internal control components.
In all audits, the auditor should obtain an understanding of each of the five components of internal control sufficient to plan the audit. An understanding is obtained by performing risk assessment procedures to evaluate the design of controls relevant to the audit and to determine whether they have been implemented (AU-C 315).
Which of the following matters relating to an entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit?
The entity enters into derivative transactions as hedges.
Inherent risk is the susceptibility of a financial statement assertion to a material misstatement before consideration of related controls. It tends to be higher for amounts derived from accounting estimates subject to significant estimation uncertainty, for example, the amounts recorded for hedges using derivative transactions.
Which of the following controls will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable?
Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
The CFO usually is responsible for authorizing write-offs of bad debts based on evidence such as receiving reports for the returned goods, correspondence with customers, collection agency reports, and recommendations by the credit department.
An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable?
A decrease in retained earnings.
An increase in net income results either in an increase in retained earnings or in unchanged retained earnings if the entire amount of net income is used to pay dividends. Retained earnings is not expected to decrease given an increase in net income.
According to PCAOB quality control standards applying to audits, the engagement quality reviewer most likely
Must be an associated person of a registered public accounting firm.
The objective of the reviewer is to evaluate the significant judgments made and the related conclusions reached. (S)he must be an associated person of a registered public accounting firm and may be from outside the firm. Moreover, the reviewer must have the competence to serve as a partner on the engagement and have independence, integrity, and objectivity. But an engagement partner on either of the two preceding audits ordinarily may not be the reviewer.
An auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s
Engagement letter:
Audit documentation:
No
Yes
The predecessor’s engagement letter is not useful for the auditor in evaluating whether to accept a new client. However, the audit documentation provides useful information for an auditor. Thus, the client should comply with the auditor’s request to authorize the predecessor to make available his or her audit documentation.
In planning an audit, an auditor should document in the working papers the auditor’s risk assessment of a material misstatement of the financial statements due to fraud. Which of the following should be included in workpaper documentation if risk factors are identified as being present?
Those risk factors identified.
The auditor documents the understanding of the entity and its environment and the assessed risks of material misstatement (RMMs). The documentation includes the identified and assessed RMMs due to fraud at the financial statement and assertion levels. The auditor also documents the response: overall responses, timing and extent of procedures, the connection of the procedures with assertion level RMMs, and the results of the procedures.
For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve
Write-offs of customer accounts.
An employee who authorizes a transaction, such as the write-off of a receivable, ordinarily should not be responsible for recording the same transaction. Segregating the functions of authorization, recordkeeping, and custody of assets reduces the possibility that an employee may be able to perpetrate and conceal fraud or error in the normal course of his or her duties.
The most likely reason the audit cannot reasonably be expected to bring all noncompliance with laws and regulations by the client to the auditor’s attention is that
Noncompliance by clients often relates to operating aspects rather than accounting aspects.
Some noncompliance, such as violations of tax law, has a direct effect on the financial statements. Other noncompliance, such as violations of environmental protection laws, relates more to an entity’s operating aspects than to its financial and accounting aspects, and their financial statement effect is indirect. An audit in accordance with GAAS usually does not include audit procedures specifically designed to detect noncompliance that has such indirect effects. Thus, no assurance is provided that such noncompliance will be detected or that resulting contingent liabilities will be disclosed. However, an audit should be designed to provide reasonable assurance that noncompliance having a direct and material effect on the financial statements will be detected.
Which of the following passwords would be most difficult to crack?
O?Ca!FlSi
To be effective, passwords should consist of random letters, symbols, and numbers and should not contain words or phrases. Accordingly, computer system users should avoid employing words for or in their passwords.
Certain individuals may have an attitude, character, or set of values that permit them to rationalize fraud. Moreover, individuals may have an incentive or be under pressure to commit fraud, or circumstances may provide an opportunity. The auditor’s concern about the risk of material misstatements due to fraud is least likely to be increased if management
Consists of many individuals that make operating and financing decisions.
Domination of the decision process by one individual or a small group (an opportunity to commit fraud) is a fraud risk factor. In that case, compensating controls, e.g., effective oversight by the audit committee, reduce risk (AU-C 240, Appendix).
The online data entry control called preformatting is
The display of a document with blanks for data items to be entered by the terminal operator.
To avoid data entry errors in online systems, a preformatted screen approach may be used. It is a screen prompting approach that involves the display on a monitor of a set of boxes for entry of specified data items. The format may even be in the form of a copy of a transaction document. This technique is best suited to conversion of data from a source document.
