12.29.18 Flashcards
An auditor’s decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by the
Auditor’s determination about whether audit risk can be sufficiently reduced.
For some assertions, analytical procedures alone may suffice to reduce audit risk to an acceptably low level. For example, the auditor’s risk assessment may be supported by audit evidence from tests of controls. Substantive analytical procedures generally are more applicable to large transaction volumes that are predictable over time (AU-C 330). The decision is based on the auditor’s professional judgment about the expected effectiveness and efficiency of the available procedures.
Which of the following steps should be performed first in applying analytical procedures?
Develop an expectation of a balance or ratio by using relationships that are expected to exist.
Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. Plausible relationships among data are reasonably expected to exist and continue in the absence of known conditions to the contrary. The first step is to develop an expectation.
An auditor may refer to and identify an auditor’s external specialist in the auditor’s report if the
Auditor expresses a disclaimer of an opinion as a result of the specialist’s findings.
The auditor may refer to an auditor’s external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor’s report with such a reference should state that it does not reduce the auditor’s responsibility (AU-C 620).
Which of the following factors has the least influence on an auditor’s consideration of the reliability of data for purposes of analytical procedures?
Whether the data were processed in a computer system or in a manual accounting system.
The consideration of the reliability of data should include sources of the data and the conditions under which the data were gathered. Whether (1) sources within the entity were independent of those who are responsible for the amount being audited, (2) the data were subjected to audit testing in the current or prior year, and (3) the data were obtained from independent sources outside the entity or from sources within the entity are more influential than the mode of processing. Other factors include whether the auditor’s expectations were developed using data from a variety of sources and whether the data were developed under a reliable system with adequate controls.
Management’s emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when
A significant portion of management compensation is represented by stock options.
The control environment is the foundation for all other control components. It provides discipline and structure, sets the tone of the organization, and influences the control consciousness of employees. It includes, among other things, integrity and ethical values. This element of the control environment may be significantly influenced when a significant portion of management compensation consists of stock options. Such compensation creates an incentive to engage in earnings management.
Analytical procedures used as risk assessment procedures should focus on
Enhancing the auditor’s understanding of the entity and its environment.
The auditor obtains an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. Risk assessment procedures are performed to obtain the understanding. They include (1) inquiries of management and others within the entity, (2) analytical procedures (analytical procedures used to plan the audit), and (3) observation and inspection.
After identifying related party transactions, an auditor most likely would
Determine whether the transactions were approved by the board of directors or other appropriate officials.
After identifying significant related party transactions outside the normal course of business, an auditor should obtain evidence that they have been appropriately authorized and approved by management, those charged with governance, or (in a proper case) the shareholders. Appropriate authorization and approval reduce but do not eliminate the risks of material misstatement due to fraud or error (AU-C 550).
Eagle Company’s financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is
Unmodified and describe the departure in an other-matter paragraph.
A material departure from GAAP prohibits expression of an opinion that financial statements are in conformity with GAAP. However, an exception is permitted when the auditor can demonstrate that because of unusual circumstances the statements would otherwise have been misleading. Given these circumstances, and if no other basis for modifying the opinion exists, the auditor may express an unmodified opinion, provided that (s)he describes in an other-matter paragraph of the report the departure, its effects, and the reasons compliance with GAAP would have been misleading.
A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, Year 3. Many of the firm’s former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit?
The client’s CFO was the lead partner on the audit until December 31, Year 1.
Independence of the accounting firm is impaired if a former partner or professional employee of the firm is subsequently employed or associated with an attest client in a key position. However, independence is not impaired if the person is no longer associated or active with the CPA firm and any retirement compensation is fixed. A CPA firm is independent if the former lead partner did not participate in any capacity in the audit of the issuer during the year before the beginning of the audit.
A CPA auditing CBX Co.’s 12/31/2017 financials determined performance materiality for current liabilities should be calculated at 1/4 of total materiality (3% of total current liabilities) and noncurrent liabilities should be calculated at 1/3 of total materiality (7% of total noncurrent liabilities). Calculate performance materiality for current liabilities based on the following:
Accounts payable: $900,000 Loan payable (due 3/17/2019): 400,000 Interest payable (due 3/31/2018); 20,000 Reserve for returns: 50,000 Note payable (due 1/1/2019): 150,000
$7,275
Materiality is a matter of professional judgment about whether misstatements could reasonably influence the economic decisions of users as a group, given their common informational needs. Performance materiality is the amount(s) set by the auditor at less than the materiality for (1) the statements as a whole or (2) particular classes of transactions, balances, or disclosures. Performance materiality is an adjustment to reduce to an appropriately low level the probability that the sum of (1) uncorrected and (2) undetected misstatements (whether or not individually material) exceeds the applicable materiality.
$7,275 = [$900,000 +$20,000 + $50,000] × [3% (total materiality %) × 1/4 (performance materiality)].
Which of the following actions should be taken by a CPA who has been asked to audit the financial statements of a company whose fiscal year has ended?
Ascertain whether circumstances are likely to permit the auditor to obtain sufficient appropriate evidence and express an unmodified opinion.
Before acceptance of an engagement near or after the close of the fiscal year, an independent auditor should determine whether circumstances permit him or her to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and to express an unmodified opinion. If they do not, the auditor and client should discuss the possibility of a qualified opinion or a disclaimer of opinion. In some cases, the auditor may be able to remedy the audit limitations, for example, by observation of another physical inventory.
Transactions indicative of the existence of related parties include all of the following except
Selling real estate at a price significantly different from the carrying amount.
Real estate’s fair value is normally significantly higher than its carrying amount. The longer that real estate is held, the more likely that its fair value differs from its carrying amount. A difference between the carrying amount and fair value does not indicate the existence of related parties. It is an occurrence in the normal course of business.
Which of the following best describes the effect of a contingent fee arrangement on the auditor’s independence?
The contingent fee arrangement impairs independence.
A fee is contingent if it is dependent on a finding or a result. A member in public practice cannot perform certain services for a contingent fee without impairing independence, e.g., (1) audits or reviews of financial statements, (2) an examination of prospective financial information, (3) certain tax services, and (4) a compilation that reasonably might be used by a third party that does not disclose the lack of independence in the report.
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
They usually use financial and nonfinancial data aggregated at a high level.
Analytical procedures are required to be used as risk assessment procedures (analytical procedures used to plan the audit) in all financial statement audits. Analytical procedures are evaluations of financial statement information made by a study of plausible relationships among financial and nonfinancial data using models that range from simple to complex. Plausible relationships among data are reasonably expected to exist and continue in the absence of known conditions to the contrary. Analytical procedures also include investigating fluctuations or relationships that are (1) inconsistent with other information or (2) differ significantly from expectations (AU-C 315). Moreover, they ordinarily use highly aggregated data.
Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit?
Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.
AU-C 240 and AS 2110 state that the identified risks of material misstatement due to fraud should be assessed at the financial statement and assertion levels. This assessment is ongoing. Thus, at the audit’s conclusion, the results of the audit procedures should be evaluated to determine whether they alter the assessments or indicate an unrecognized fraud risk. Furthermore, if not already performed to determine the overall conclusion, analytical procedures related to revenue should be performed through the end of the period.
