1.13.19 Flashcards
After audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up audit documentation review. This second review usually focuses on
Whether the financial statements are consistent with the auditor’s understanding of the entity.
Analytical procedures should be used to assist the auditor to form an overall conclusion. The purpose of those procedures is to determine whether the statements are consistent with the auditor’s understanding of the entity (AU-C 520).
Which of the following statements would least likely appear in an auditor’s engagement letter?
After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement.
The terms of the engagement should be documented in an engagement letter that states the (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) applicable financial reporting framework, and (5) expected form and content of audit reports. But the engagement letter does not describe the specific evidence collection process to be completed by the auditor.
A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA’s dependent minor child. The trust securities were not material to the CPA but were material to the child’s personal net worth. Is the independence of the CPA considered to be impaired with respect to the client?
Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor.
Independence is impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client. With some exceptions, the immediate family (spouse, spousal equivalent, or dependent) of a covered member is subject to the Independence Rule and its interpretations. Because the covered member is a grantor of a revocable trust, the trust and its underlying investments are direct financial interests. Given that the securities were stock in an audit client, independence is impaired.
Which of the following describes a weakness in accounts payable procedures?
The accounts payable manager issues purchase orders.
To maintain a proper segregation of duties, the purchasing agent, not the accounts payable manager, should issue purchase orders. The accounts payable manager performs a recording function. (S)he should not be able to authorize transactions or have custody of assets.
The acceptable level of detection risk is inversely related to the
Assurance provided by substantive procedures.
For a given audit risk, the acceptable detection risk is inversely related to the assessed risks of material misstatement. As the RMMs increase, the acceptable detection risk decreases, and the auditor requires more persuasive audit evidence. The auditor may (1) change the types of audit procedures and their combination, e.g., confirming the terms of a contract as well as inspecting it; (2) change the timing of substantive procedures, such as from an interim date to year end; or (3) change the extent of testing, such as by using a larger sample (AU-C 330 and AS 2301).
According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent?
Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider.
A member in public practice must not disclose confidential client information without the client’s consent. However, this rule does not affect a CPA’s obligations to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, and (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. Moreover, a member in public practice may disclose confidential client information to a third-party service provider used by the member to provide professional services or for administrative support purposes. However, before using such a service provider, the member should enter into a contract with the service provider to maintain the confidentiality of the information and be reasonably assured that the service provider has appropriate procedures to prevent the unauthorized release of confidential information to others. If the member does not have a confidentiality agreement with a third-party service provider, specific client consent should be obtained.
Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?
Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.
The safeguarding of assets requires physical controls, for example, the use of a safe-deposit box requiring two signatures to gain admittance.
In determining the effectiveness of an entity’s policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and
Observe the segregation of duties concerning human resources responsibilities and payroll disbursement.
In considering whether transactions actually occurred, the auditor is most concerned about the proper segregation of duties between the human resources department (authorization) and the payroll disbursement (custody function).
An auditor might consider the procedures performed by the internal auditors because
They are employees whose work may affect the nature, timing, and extent of audit procedures.
The internal audit function is part of the monitoring component of internal control. Consequently, the auditor should obtain an understanding of the internal audit function sufficient to identify activities relevant to planning the audit. The external auditor may plan to use the work of the internal auditors to obtain audit evidence or to provide direct assistance. In this case, (s)he should assess their competence and objectivity. If that assessment is favorable, the auditor then considers how the internal auditors’ work may affect the audit. If it significantly affects the audit procedures, the auditor should evaluate and test that work.
To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?
Sales returns.
To conceal a theft of customer payments on account, a bookkeeper debits sales returns and credits accounts receivable. If accounts receivable are not credited, the customer will continue to be billed and will complain.
Which of the following activities most likely would detect whether payroll data were altered during processing?
Using test data to verify the performance of edit routines.
The test data approach uses the computer to test the processing logic and controls within the system and the records produced. The auditor prepares a set of dummy transactions specifically designed to test the control activities that management claims to have incorporated into the processing programs. The auditor can expect the controls to be applied to the transactions in the prescribed manner. Thus, the auditor is testing the effectiveness of the controls over the payroll data.
If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll computer application?
Department numbers.
The three types of control totals are record counts, financial (amount) totals, and hash totals. Record counts establish the number of source documents and reconcile it to the number of output records. Financial (amount) totals compute dollar or amount totals from source documents (e.g., the total dollar amount of invoices processed) and reconcile them with the output records. Hash totals add numbers on input documents that are not normally added (e.g., department numbers for payroll processing) and reconcile them with output records.
The objective of performing analytical procedures in planning an audit is to identify the existence of
Unusual transactions and events.
The objective of analytical procedures is to identify such things as the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning ramifications.
The client’s computer exception reporting system helps an auditor to conduct a more efficient audit because it
Highlights abnormal conditions.
The exception reporting system highlights abnormal conditions and allows the auditor to focus on problem areas. Exception reports, also called error listings, suspense listings, and edit reports indicate the errors discovered by the controls. They permit the auditor to evaluate the effectiveness with which errors are investigated and corrected and the corrected transactions resubmitted.
The AICPA Code of Professional Conduct
Expects the CPA to honor the public trust.
The nonbinding Principles state that members should act to benefit the public interest and honor the public trust.
