12.29.18 Flashcards
As the acceptable level of audit risk decreases, an auditor may
Postpone the planned timing of substantive tests from interim dates to the year end.
A decrease in the acceptable level of audit risk or in the amount considered material will result in the auditor’s modifying the audit plan to obtain greater assurance from substantive testing by (1) selecting a more effective audit procedure, (2) applying procedures nearer to year end, or (3) increasing the extent of particular tests.
The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider?
Nonfinancial information that may affect financial information.
Analytical procedures may be effective when tests of details may not indicate potential misstatements. For example, they may be effective for testing the completeness assertion. By understanding the assertion, the auditor can develop analytical procedures that best test it.
An auditor searching for related party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because
The business structure may be deliberately designed to obscure related party transactions.
The nature of related party relationships and transactions may result in greater risks of material misstatement than transactions with unrelated parties. Thus, related parties may operate through a complex set of relationships and structures, with increased complexity of related party transactions. For example, a transaction may involve multiple related parties in a consolidated group. Accordingly, in an audit of group statements, the group engagement team should request each component auditor to communicate with related parties not previously identified by group management or the group engagement team.
An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?
Analytical procedures.
According to AU-C 520, Analytical Procedures, analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor.
According to PCAOB quality control standards applying to an audit, the engagement quality reviewer evaluates
The documentation.
The EQR process in an audit evaluates the significant judgments made. This involves discussions with the engagement partner and other team members and reviewing whether the documentation supports the conclusions reached and appropriate responses to significant risks.
Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?
Establish policies to ensure that the audit work meets applicable professional standards.
One of the elements of a system of quality control is engagement performance. Thus, policies and procedures should be established to provide reasonable assurance that (1) engagements are consistently performed in accordance with professional standards and legal and regulatory requirements and (2) the firm issues appropriate reports. Matters addressed include responsibilities for performance, supervision, and review.
One of the elements of a system of quality control is engagement performance. Thus, policies and procedures should be established to provide reasonable assurance that (1) engagements are consistently performed in accordance with professional standards and legal and regulatory requirements and (2) the firm issues appropriate reports. Matters addressed include responsibilities for performance, supervision, and review.
May be individually reasonable but collectively indicate possible bias.
If the amount in the financial statements is not reasonable, it should be treated as fraud or error and accumulated with other identified misstatements. If the differences between the best estimates and those in the financial statements are individually reasonable but collectively indicate possible bias (for example, when the effect of each difference is to increase income), the auditor should reconsider the estimates as a whole.
If the amount in the financial statements is not reasonable, it should be treated as fraud or error and accumulated with other identified misstatements. If the differences between the best estimates and those in the financial statements are individually reasonable but collectively indicate possible bias (for example, when the effect of each difference is to increase income), the auditor should reconsider the estimates as a whole.
The entity’s industry is experiencing declining customer demand.
Certain risk factors are related to misstatements arising from fraudulent reporting. These factors may be grouped in three categories: (1) incentives or pressures, (2) opportunities, and (3) attitudes or rationalizations. One set of risk factors in the incentives or pressures category consists of threats to financial stability or profitability by economic, industry, or entity operating conditions. Examples are significant declines in customer demand and increasing business failures in either the industry or the overall economy (AU-C 240).
Which of the following would be least likely to suggest to an auditor that the client’s management may have overridden internal control?
Differences are always disclosed on a computer exception report.
The disclosure of differences on a computer exception report suggests that management is not overriding internal control (presumably, exceptions would not be listed if management were overriding the system).
Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?
Compare recorded financial information with anticipated results from budgets and forecasts.
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.
According to AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards, “presumptively mandatory requirements” in the auditing standards use which word?
Should.
The auditor must comply with a presumptively mandatory requirement in all cases in which the requirement is relevant except in rare cases. The standards use the word “should” to indicate this requirement.
Before accepting an audit engagement, an auditor should make specific inquiries of the predecessor auditor regarding
Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.
The auditor should make specific and reasonable inquiries of the predecessor auditor that include specific questions regarding, among other things, disagreements with management as to accounting principles and auditing procedures.
With regard to assignment of personnel to an engagement team, a CPA firm’s policies and procedures should include
Consideration of the team’s understanding of similar engagements through training and participation.
The quality control element of human resources requires assignment of appropriate personnel with the competence and capabilities to (1) perform engagements in accordance with professional standards and legal and regulatory requirements and (2) enable the firm to issue appropriate reports. The determination of team assignments and levels of supervision includes considering the team’s understanding of similar engagements through appropriate training and practical experience.
The SEC has strengthened auditor independence by requiring that management
Report the nature of disagreements with former auditors.
The SEC requires that the management of an issuer (public company) report the nature of disagreements with former auditors by filing Form 8-K. Such disclosure inhibits management from changing auditors to gain acceptance of a questionable accounting principle. Also, a potential auditor must inquire of the predecessor auditor before accepting an engagement (AU-C 210). Thus, the inquiry provides an opportunity to confirm the information given in the 8-K report. However, confidential client information may only be communicated with the client’s consent.
Which of the following matters does an auditor usually include in the engagement letter?
Arrangements regarding fees and billing.
The engagement letter documents the terms of the auditor’s agreement with management or those charged with governance. It includes (1) the objective and scope of the audit; (2) the responsibilities of the auditor and management; (3) the inherent limitations of the audit and internal control; (4) the financial reporting framework; (5) the expected form and content of reports; and (6) other relevant information, such as fee arrangements, billings, and assistance by the client’s staff (AU-C 210).
