1.21.18 Flashcards
The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is
Detection risk.
Detection risk is the risk that the procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material individually or combined with other misstatements (AU-C 200 and AS 1101).
An auditor uses the knowledge provided by the understanding of internal control and the assessed risks of material misstatement primarily to
Determine the nature, timing, and extent of substantive procedures for financial statement assertions.
The auditor is required to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement of the financial statements, whether due to fraud or error, to provide a basis for responding to the assessed RMMs. Regardless of the assessed RMMs, the auditor performs substantive procedures for all relevant assertions for material classes of transactions, account balances, and disclosures. Moreover, the auditor designs and performs further audit procedures whose nature, timing, and extent respond to the assessed RMMs at the relevant assertion level.
If not already done to form an overall conclusion, the auditor should perform analytical procedures relating to which of the following transaction cycles?
Revenue.
Revenue is an account for which expectations can be developed by the auditor. It is a key account that should be predictable.
If an auditor performing an integrated audit identifies one or more material weaknesses in a nonissuer’s internal control, the auditor should
Express an adverse opinion on the entity’s internal control.
Material weaknesses are significant control deficiencies that result in more than a remote chance that a material misstatement will result in the financial statements. A material weakness requires the auditor to express an adverse opinion on the effectiveness of internal control.
A CPA had previously communicated a significant control deficiency in connection with an audit of prior financial statements of a nonissuer. As of the current audit date, the deficiency has not been corrected. What communication should be made by the CPA?
The condition should be reported.
AU-C 265 requires communication about significant deficiencies and material weaknesses and makes no exception solely for previous reporting of a condition. This can be accomplished by a written communication referring to the previously written communication and the date of that communication.
If an auditor wishes to decrease the acceptable level of audit risk, which of the following changes in the substantive procedures performed will not effectively provide greater assurance?
A change in the timing of substantive procedures from year-end to interim dates
A lower acceptable level of audit risk increases the assurance to be provided by substantive procedures. To obtain greater assurance, the auditor may change the nature, timing, or extent of substantive procedures. For example, as the risks of material misstatement increase, the auditor is more likely to perform substantial procedures at period-end rather than interim dates. This change reduces the risk of not detecting material misstatements that may exist at period-end (AU-C 330).
Competence as an independent auditor includes all of the following except
Warranting the infallibility of the work performed.
The auditor is not a guarantor. The auditor’s responsibility is to express (or disclaim) an opinion on whether the financial statements, taken as a whole, are presented fairly. The audit is planned and performed to provide reasonable, but not absolute, assurance that the financial statements are not materially misstated.
In performing tests of controls, the auditor will normally find that
The rate of deviations in the sample exceeds the rate of error in the accounting records.
When testing controls, the auditor is directly concerned with deviations from specific controls. Failure to comply with a control does not necessarily result in an error in the records. For example, the absence of an authorization signature does not necessarily mean that the transaction was improperly recorded. Accordingly, the rate of deviations from a control normally exceeds the error rate in the records.
An auditor most likely would assess the risks of material misstatement as unacceptable if the payroll department supervisor is responsible for
Authorizing payroll rate changes for all employees.
The payroll department should be independent of the human resources department, which would be responsible for authorizing all payroll rate changes for the employees of the entity. A supervisor would be authorized, however, to initiate requests for rate increases for supervised employees.
An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?
The planned level of assurance at the relevant assertion level.
Tests of details of transaction classes, account balances, and disclosures are substantive procedures. Some substantive procedures should be performed for all relevant assertions related to each material transaction class, balance, and disclosure. With respect to obtaining audit evidence, the auditor’s objective is to obtain sufficient appropriate evidence to be able to draw reasonable conclusions as a basis for an opinion on whether statements are materially misstated. To design and perform further audit procedures (substantive procedures and tests of controls), the auditor assesses the risks of material misstatement at the financial statement and relevant assertion levels.
A test of a payroll system involved comparing an individual’s number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test?
Reasonableness test.
Reasonableness tests are used to test quantities received to determine whether they are comparable to an acceptable amount.
An audit of the electronic data interchange (EDI) area of a purchasing department revealed the facts listed below. Which one indicates the need for improved internal control?
Branch office employees may access the server with a single call via modem.
The system should employ automatic dial-back to prevent intrusion by unauthorized parties. This procedure accepts an incoming modem call, disconnects, and automatically dials back a prearranged number to establish a permanent connection for data transfer or inquiry.
Which of the following best describes a CPA’s responsibility to report on an issuer’s (public company’s) internal control over financial reporting?
To examine the effectiveness of its internal control.
The auditor’s objective is to express an opinion on whether internal control is effective, in all material respects, based on the control criteria.
Which of the following events most likely would indicate the existence of related parties?
Selling real estate at a price significantly different from appraised value.
The following suggest the existence of related party transactions: (1) exchanging property for similar property in a nonmonetary transaction, (2) borrowing or lending at rates significantly above or below market rates, (3) selling realty at a price materially different from its appraised value, and (4) making loans with no scheduled repayment terms.
In identifying matters for communication with an entity’s audit committee, an auditor most likely would ask management whether
It consulted with another CPA firm about accounting matters.
Unless all those charged with governance are managers, the auditor should communicate his or her views on significant accounting and auditing matters about which management consulted with other accountants (AU-C 260).
