1.24.19

Question 1

In an environment that is highly automated, an auditor determines that it is not possible to obtain sufficient appropriate audit evidence solely by performing substantive procedures on transactions. Under these circumstances, the auditor most likely would

Answer 1

Perform test of controls.

For some RMMs, the auditor may determine that it is not feasible to obtain sufficient appropriate audit evidence only from substantive procedures. These RMMs may relate to routine, significant transactions subject to highly automated processing with no documentation except what is recorded in the IT system. In such circumstances, the controls over the RMMs are relevant to the audit. Thus, the auditor should obtain an understanding of, and test, the controls.

Question 2

An auditor (the user auditor) may decide to make use of another auditor’s (the service auditor’s) report on internal control at a service organization that provides certain services to the user auditor’s client. When the client’s transactions flow through the service organization’s accounting system, consideration of internal control may be necessary. The most efficient approach is often to obtain a service auditor’s report. Which of the following is a true statement about the relationship of the user and service auditors?

Answer 2

When reporting on an audit of financial statements, the user auditor should not refer to the service auditor’s report if the opinion is unmodified.

Because the service auditor is not responsible for auditing any portion of the financial statements being reported on by the user auditor, the service auditor should not be referred to in the user auditor’s report if the opinion is unmodified. But if the user auditor modifies the opinion because of a modified opinion by the service auditor, the user auditor may refer to the service auditor.

Question 3

Which of the following is true related to the auditor’s consideration of controls?

Answer 3

Misstatements detected by the auditor’s substantive procedures should be considered when testing the effectiveness of related controls.

Misstatements detected by the auditor’s substantive procedures should be considered when testing the effectiveness of related controls. The auditor may need to assess the RMMs at a higher level if fraud or error is detected that should have been detected by the entity’s controls.

Question 4

For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent

As risk assessment procedures:
As substantive procedures:
To assist in forming overall conclusion:

Answer 4

Yes
No
Yes

Analytical procedures should be applied as risk assessment procedures to obtain an understanding of the entity and its environment, including internal control, and to assess the risks of material misstatement. They also may, but are not required to, be applied as substantive procedures. These are procedures (tests of details and analytical procedures) designed to detect material misstatements at the assertion level. Moreover, the auditor should perform analytical procedures near the end of the audit to assist in forming an overall conclusion. The purpose is to determine whether the statements are consistent with the auditor’s understanding.

Question 5

Which of the following controls is most effective in providing assurance that recorded purchases are free of material errors?

Answer 5

Purchase orders, receiving reports, and vendors’ invoices are independently matched in preparing vouchers.

A voucher should not be prepared for payment until the vendor’s invoice has been matched against the corresponding purchase order and receiving report (and often the requisition). This procedure provides assurance that a valid transaction has occurred and that the parties have agreed on the terms, such as price and quantity.

Question 6

Which of the following factors would most likely influence the form and extent of the auditor’s documentation of an entity’s internal control environment?

Answer 6

Complexity and size of the entity.

GAAS require documentation of the understanding of the entity and its environment, including its internal control. This documentation includes each control component, e.g., the control environment. The form, content, and extent of audit documentation are determined by many factors, for example, the complexity and size of the entity.

Question 7

In using the work of an auditor’s external specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditor

Answer 7

Modifies the opinion because of a material misstatement with effects that are not pervasive.

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).

Question 8

Which of the following internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead?

Answer 8

Use of time tickets to record actual labor worked on production orders.

Time tickets should specifically identify labor hours as direct or indirect.

Question 9

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements?

Answer 9

Significant differences between the physical inventory count and the accounting records are not investigated.

If a significant amount of inventory is missing, the inventory and the statements are materially misstated. If the physical inventory is significantly greater than the accounting records indicate, the entity may not have sold as much inventory as it claimed. The result is overstated revenues, financial statements that are materially misstated, and an increased risk of fraud.

Question 10

An auditor who decides not to rely on controls should

Answer 10

Document the further audit procedures performed.

The auditor performs further audit procedures in response to the assessed risks of material misstatement at the assertion level. The auditor should document the nature, timing, and extent of further audit procedures. Documentation is necessary even if the auditor emphasizes substantive procedures and does not use tests of controls. For example, (1) risk assessment procedures may not have identified any effective controls relevant to the assertion, or (2) testing controls might be inefficient (AU-C 330).

Question 11

Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of

Answer 11

Professional skepticism.

The auditor should maintain professional skepticism throughout the audit. Professional skepticism is an “attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and critical assessment of audit evidence” (AU-C 200).

Question 12

Moor, CPA, discovers a likely fraud during an audit but concludes that its effects, if any, could not be so material as to affect the opinion. Moor most likely should

Answer 12

Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion.

The auditor should refer the matter of an immaterial fraud to an appropriate level of management. The appropriate level of management ordinary is at least one level above the highest level involved. However, any fraud involving (1) management, (2) employees significantly involved in internal control, or (3) others when fraud materially misstates the financial statements, is reported to those charged with governance.

Question 13

The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because

Answer 13

Customers may not be inclined to report understatement errors in their accounts.

Confirmations do not address all assertions with equal effectiveness. For example, confirmations of accounts receivable do not necessarily provide reliable evidence about the completeness assertion because customers may not report understatements. Also, confirmations may not be designed to provide assurance about information not given in the request forms.

Question 14

In an audit of financial statements for which an auditor’s assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?

Answer 14

Perform substantive procedures for all relevant assertions related to each material class of transactions.

Substantive audit procedures are designed to detect material misstatements at the assertion level.

Question 15

Which of the following types of evidence generally is the most reliable?

Answer 15

Confirmation of account information from third parties.

Audit evidence should be sufficient and appropriate. Appropriate evidence is reliable and relevant. Ordinarily, evidence obtained from independent sources (e.g., from external confirmation of account information) is usually reliable (AU-C 500).

Question 16

In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to

Answer 16

Identify the potential financial statement effects of misstatements that were not considered clearly trivial when discovered.

The schedule of uncorrected misstatements identifies for management and the auditor the potential cumulative financial statement effect of misstatements. A misstatement arises from fraud or error. It is a difference between the amount, classification, presentation, or disclosure of a reported item and the amount, etc., required for the item to be presented fairly. Misstatements also include adjustments of amounts, etc., the auditor judges to be needed for the statements to be fairly presented. The auditor accumulates misstatements that are not clearly trivial. (“Clearly trivial” is not the same as immaterial. Clearly trivial matters are clearly inconsequential individually and combined with other misstatements. Given any uncertainty about whether a matter is clearly trivial, it is considered not clearly trivial.) The auditor should communicate to appropriate management on a timely basis the accumulated misstatements and evaluate the effect of material uncorrected misstatements.

Question 17

An auditor tests an entity’s policy of obtaining credit approval before shipping goods to customers in support of management’s financial statement assertion of

Answer 17

Valuation.

The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that balances are reported at appropriate amounts, e.g., accounts receivable at net realizable value.

Question 18

After obtaining an understanding of internal control in a financial statement audit, an auditor has concluded that it is well designed and is operating effectively. Under these circumstances, the auditor would most likely

Answer 18

Not increase the extent of substantive procedures.

The auditor should obtain reasonable assurance about whether the financial statements are free from material misstatement to permit expression of an opinion on whether they are fairly presented. To obtain reasonable assurance, the auditor collects sufficient appropriate evidence to reduce audit risk to an acceptable level. For the given audit risk and the assessed inherent risk, a lower assessed control risk results in lower assessed risks of material misstatement and a higher acceptable detection risk. Detection risk relates to the nature, timing, and extent of audit procedures. For a higher acceptable detection risk, the less persuasive the audit evidence the auditor requires and the less need to increase the extent of substantive procedures (AU-C 200).

Question 19

To what degree, if at all, is a significant deficiency related to a material weakness?

Answer 19

It is less severe than a material weakness.

A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness but that merits attention by those charged with governance.

Question 20

Which of the following factors most likely would assist an auditor in assessing the objectivity of the internal auditor?

Answer 20

The organizational status of the director of internal audit.

If the external auditor plans to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, the competence and objectivity should be evaluated. Objectivity is promoted when the internal auditors (1) report to those charged with governance rather than management, (2) are free of any conflicting responsibilities, (3) work without constraints, and (4) are members of professional organizations that obligate them to be objective. The external auditor should assess each of these factors in evaluating objectivity.