1.15.18 Flashcards
A violation of the AICPA’s ethical standards most likely would have occurred when a CPA
Received a fee for referring audit clients to a company that sells limited partnership interests.
A member in public practice cannot accept a commission for 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.
Organizational independence in the processing of payroll is achieved by functional segregations that are built into the system. Which one of the following functional segregations is not required for internal control purposes?
Segregation of payroll preparation and maintenance of year-to-date records.
Most companies have their payrolls prepared by the same individuals who maintain the year-to-date records. A functional segregation is not needed because both duties involve recordkeeping.
According to AU-C 315, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, not all controls are relevant to a financial statement audit. Which one of the following would most likely be considered in an audit?
Maintenance of control over unused checks.
Ordinarily, controls that are relevant to a financial statement audit pertain to the entity’s objective of preparing financial statements that are fairly presented in accordance with the applicable reporting framework, including managing the risks of material misstatements. Maintenance of control over unused checks is an example of a relevant control because the objective is to provide assurance about the existence assertion for cash.
An auditor is concerned with controls designed to safeguard assets that are relevant to the reliability of financial reporting. Adequate safeguards over access to and use of assets means protection from
Losses arising from access by unauthorized persons.
A management objective implicit in internal control is that access to assets be permitted only in accordance with management’s authorization. However, elimination of access is not feasible because access to assets is necessary in normal business operations. The extent of access is determined by the nature of the assets and their susceptibility to loss through fraud and error. Authorization of access involves limitations on both physical access and indirect access.
Which of the following statements is true about related party transactions?
The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.
The auditor should inspect any contracts or agreements to evaluate whether (1) the business purpose (or lack of a business purpose) implies that the transaction’s intent was fraudulent, (2) the terms are consistent with management’s explanations, and (3) the accounting and disclosure are appropriate. The auditor also should obtain evidence of appropriate authorization and approval.
Which of the following factors would the independent auditor most likely consider in assessing the objectivity of an internal auditor?
The audit committee reviews employment decisions related to the director of internal auditing.
Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Factors that the independent auditor most likely considers in assessing the objectivity of an internal auditor include whether those charged with governance (e.g., the audit committee) oversee employment decisions related to internal auditing. Examples are hiring and compensation of the director of the internal audit function.
Which of the following activities most likely would be considered a weakness in an entity’s internal control over payroll?
The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
The payroll department assembles payroll information, which is a recording function. Custody of assets, such as unclaimed payroll checks, is incompatible with record keeping.
Effective controls relevant to purchasing of raw materials should usually include all of the following except
Obtaining third-party written quality and quantity reports prior to payment for the raw materials.
Obtaining third-party written quality and quantity reports prior to payment for raw materials is unnecessary. Only in exceptional cases when client personnel are not sufficiently knowledgeable about the purchased goods would outside advice be necessary.
In a well-designed internal control system, the same employee may be permitted to
Mail signed checks and also cancel supporting documents.
The cash disbursements department has an asset custody function. Consequently, this department is responsible for signing checks after verification of their accuracy by reference to the supporting documents. The supporting documents should then be canceled and the checks mailed. Cancelation prevents the documentation from being used to support duplicate payments. Moreover, having the party who signs the checks place them in the mail reduces the risk that they will be altered or diverted.
If a payroll system continues to pay employees who have been terminated, control weaknesses most likely exist because
There were inadequate manual controls maintained outside the computer system.
The authorization to pay employees comes from outside the computer department. Thus, ineffective controls external to the computer processing department are most likely the cause of allowing the payments to terminated employees to continue without detection.
When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor would be most concerned about the
Potential for computer disruptions in recording sales.
Processing sales on the Internet (often called e-commerce) creates new and additional risks for clients. The client should use effective controls to ensure proper acceptance, processing, and storage of sales transactions. Threats include not only attacks from hackers but also system overload and equipment failure.
Which of the following services, if any, may an accountant who is not independent provide?
Preparations and compilations but not reviews.
A compilation provides no assurance. Thus, the accountant need not be independent. The report describes the compilation service and disclaims an opinion or conclusion or any other form of assurance on the financial statements. The accountant discloses a lack of independence in the report. An accountant who prepares financial statements need not be, or determine whether (s)he is, independent. Also, no report is required.
Which of the following organizational controls related to the processing of scrap would you recommend?
Segregate the responsibility for processing scrap materials from the operational activities that produce the scrap materials.
Organizational controls address the segregation of functional responsibilities: custodianship, recordkeeping, authorization, and execution. Thus, those who generate the scrap should not subsequently process it.
Which of the following is a component of internal control?
Risk Assessment.
Internal control has five components: (1) the control environment, (2) risk assessment process, (3) control activities, (4) information systems, and (5) monitoring of controls. The control environment sets the tone of an organization, influences control consciousness, and provides a foundation for the other components. The risk assessment process is the identification, analysis, and management of risks relevant to achievement of objectives. Control activities help ensure that management directives are executed. The information system, including the related business processes relevant to financial reporting and communication, consists of (1) physical and hardware components, (2) software, (3) people, (4) procedures, and (5) data. Monitoring assesses the performance of internal control over time (AU 315).
Which of the following is the most important control over acquisitions of property, plant, and equipment?
Using a budget to forecast and control acquisitions and retirements.
The use of a budget to forecast and control acquisitions and retirements alerts management to any transactions that are unusual, appear unnecessary, or are unauthorized.
