12.30.18 Flashcards
Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that
Additional procedures are required.
Analytical procedures used to form an overall conclusion ordinarily include reading the financial statements and considering (1) the adequacy of evidence regarding unusual or unexpected balances detected during the audit and (2) such balances or relationships not detected previously. If analytical procedures detect a previously unrecognized risk of material misstatement, the auditor must revise the assessments of the RMMs and modify the further planned procedures. Inconsistent fluctuations or relationships or significant differences should result in (1) inquiries of management, (2) corroboration of responses with other audit evidence, and (3) performance of any necessary other procedures. Moreover, the RMM due to fraud should be considered.
In connection with the audit of financial statements by an auditor, the client suggests that members of the internal audit staff be used to minimize audit costs. For which of the following tasks may the auditor most appropriately request direct assistance from the internal audit staff?
Preparation of schedules for negative accounts receivable responses.
Internal auditors may provide direct assistance in performing both substantive procedures and tests of controls provided that the auditor assesses their competence and objectivity; supervises, reviews, evaluates, and tests their work; and makes all judgments regarding matters that affect the report on the financial statements. Preparing schedules for negative accounts receivable responses is a clerical activity related to a substantive procedure that an internal auditor may perform under the supervision of the auditor.
An auditor compares this year’s revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that
The client changed its capitalization policy for small tools this year.
Investigating changes in revenues and expenses should detect unusual events, transactions, etc., that have an impact on the income statement accounts. A change in the capitalization policy for tools in the current year would probably have a significant effect on small tools expense.
Which of the following is not considered an auditor’s specialist?
Internal auditor.
For the purposes of AU-C 620, an auditor’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The external auditor should consider the work of internal auditors but should not deem them to be specialists in the sense contemplated by AU-C 620.
Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?
Comparing the current-year account balances for conformity with predictable patterns.
Analytical procedures applied as risk assessment procedures (analytical procedures used to plan the audit) at the beginning of the audit may improve the understanding of the client’s business and significant transactions and events since the last audit. They also may identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit implications (AU-C 315).
The company being audited has an internal auditor that is both competent and objective. The auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the auditor may
Allow the internal auditor to perform tests of internal controls.
The auditor may request direct assistance from the internal auditor when performing the audit. Thus, the auditor may appropriately request the internal auditor’s assistance in obtaining the understanding of internal control, performing tests of controls, or performing substantive procedures. The internal auditor may provide assistance in all phases of the audit if (1) the internal auditor’s competence and objectivity have been assessed, and (2) the auditor supervises, reviews, evaluates, and tests the work performed by the internal auditor to the extent appropriate.
Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality for the financial statements as a whole?
The entity’s year-to-date financial results and position.
The auditor’s judgment about materiality for the financial statements as a whole might be based on benchmarks used as starting points. Examples are (1) categories of reported income (profit before tax, total revenue, gross profit, and total expenses), (2) total equity, and (3) net asset value. For profit-oriented entities, pretax profit from continuing operations is often used. The financial data for the benchmark usually includes (1) prior-period information, (2) period-to-date information, (3) budgets, or (4) forecasts. But recognition should be given to the effect of major changes in the entity’s circumstances (for example, a significant merger) and relevant changes in the economy as a whole or the industry in which the entity operates (AU-C 320 and AS 2105).
An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that
Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
Unrealized gains from increases in the value of available-for-sale securities should be recorded directly in other comprehensive income (a component of equity). Unrealized gains from increases in the value of trading securities should be included in income. Thus, a more-than-10% increase in income could have been caused by improper accounting for available-for-sale securities.
In assessing the competence and objectivity of an entity’s internal auditor, an independent auditor would least likely consider information obtained from
The results of analytical procedures.
Analytical procedures are evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data, using models that range from simple to complex. They are substantive procedures used by the auditor to gather evidence about the fairness of the financial statements.
Ordinarily, the predecessor auditor permits the auditor to review the predecessor’s audit documentation relating to
Contingencies:
Balance Sheet accounts:
Yes
Yes
The Code of Professional Conduct protects the confidentiality of client information. Accordingly, the predecessor auditor cannot permit the auditor to review the predecessor’s audit documentation without management’s specific consent. Moreover, the auditor and the predecessor auditor must keep in confidence information obtained from each other. However, the predecessor auditor ordinarily is expected to cooperate with the auditor and respond fully. Audit documentation records the audit procedures performed, relevant evidence obtained, and conclusions reached. The auditor ordinarily reviews audit documentation related to planning, internal control, audit results, and other matters of continuing accounting and auditing significance, such as the analysis of balance sheet accounts, and those relating to contingencies.
If the auditor considers an act of noncompliance with laws and regulations to be sufficiently serious to warrant withdrawing from the engagement, the auditor would likely
Consult with legal counsel as to what other action, if any, should be taken.
According to AU-C 250, the auditor should consider consulting legal counsel in these circumstances. Such consultation may be necessary in determining the effects of continued association with the client or whether the auditor may have a duty to notify parties outside the client that overrides his or her duty of confidentiality to the client.
A violation of the profession’s ethical standards would most likely have occurred when a CPA in public practice
Serves on a municipal board of income tax appeals, discloses that status to concerned parties, participates as a board member in a tax appeal involving a client, but does not receive the client’s consent for such action.
If the significant relationship creating a conflict of interest is disclosed to and consent is obtained from all appropriate parties, the Integrity and Objectivity Rule does not prohibit performance of the professional service. (But disclosure and consent do not eliminate an impairment of independence.) The failure to secure the client’s consent therefore means that the arrangement could be viewed as impairing the CPA’s objectivity.
In assessing the competence of a client’s internal auditor, an auditor most likely would consider the
Internal auditor’s compliance with professional internal auditing standards.
The external auditor customarily inquires about the application of professional standards by the internal auditors. The external auditor should assess the competence and objectivity of the internal auditors. Compliance with the internal auditing standards developed by The Institute of Internal Auditors or by the Government Accountability Office is one measure of the competence and objectivity of internal auditors.
The work of internal auditors may affect the independent auditor’s
I. Procedures performed in obtaining an understanding of internal control
II. Procedures performed in assessing the risks of material misstatement
III. Substantive procedures performed in gathering direct evidence
I, II, & III.
The internal audit function is part of the client’s internal control. The auditor should obtain an understanding of this function when obtaining an understanding of internal control. The auditor also may use the internal auditors to provide direct assistance under certain conditions. A primary purpose of internal auditors is to review, assess, and monitor internal control. Thus, their work is relevant to the understanding of internal control and the assessment of risk. Moreover, some procedures performed by internal auditors, such as confirmations, may provide direct evidence about material misstatements.
All of the following are audit quality control requirements contained in the Sarbanes-Oxley Act of 2002 except
The audit report must be submitted to the Public Company Accounting Oversight Board prior to issuance.
Audit reports must be determined appropriate for issuance by the CPA firm but need not be approved by the PCAOB.
