1.26.19 Flashcards
The permanent file section of the audit documentation that is kept for each audit client most likely contains
Narrative descriptions of the client’s accounting procedures and internal control.
The permanent section of the auditor’s audit documentation usually contains copies of important entity documents. They may include (1) the articles of incorporation, share options, contracts, and bylaws; (2) the engagement letter, which is the contract between the auditor and the client; (3) analyses from previous audits of accounts of special importance to the auditor, such as noncurrent debt, PP&E, and shareholders’ equity; and (4) information about internal control, e.g., flowcharts, organization charts, and questionnaires.
The audit of internal control over financial reporting should test
Design effectiveness:
Operating effectiveness:
Yes
Yes
The auditor should test design effectiveness by determining whether the controls, if they are operated as prescribed by persons with the necessary authority and competence to perform the control effectively, (1) satisfy the control objectives and (2) can effectively prevent, or detect and correct, fraud or errors that could result in material misstatements in the financial statements. The auditor should test the operating effectiveness of a control by determining whether (1) the control is operating as designed and (2) the person performing the control possesses the necessary authority and competence to perform the control effectively.
At the conclusion of an audit, an auditor is reviewing the audit evidence obtained. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management’s assertions. Which of the following actions is the auditor most likely to take?
Obtain additional evidence regarding the valuation of inventory.
If the audit evidence is not sufficient and appropriate, the auditor should perform other procedures, such as tests of details or analytical procedures.
During the consideration of a small business client’s internal control, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?
The owner reviews the credit memos after they are recorded.
The clerk can both perpetrate and conceal a fraud in the normal course of his or her duties. The clerk has custody of cash, performs the recordkeeping function for accounts receivable, and authorizes credit memos. Thus, the clerk could conceal a theft of cash collected from customers on account by authorizing sales returns. In a small business, cost-benefit considerations ordinarily preclude establishment of formal control activities. In this situation, effective owner-management involvement may compensate for the absence of certain control activities. Accordingly, the owner should determine that credit memos are genuine.
Which of the following statements about significant deficiencies and material weaknesses in internal control is true for an audit of a nonissuer?
An auditor may communicate significant deficiencies and material weaknesses during an audit or after the audit’s completion.
When early communication is important, the auditor may communicate significant matters orally during an audit. However, significant deficiencies and material weaknesses are best communicated by the audit report release date. But they are required to be made no later than 60 days after the report release date.
Which of the following procedures would be most effective in reducing attestation risk?
Examination of evidence.
To express an opinion, the practitioner must gather sufficient evidence to reduce attestation risk to an acceptably low level.
An auditor will most likely use computer-assisted audit techniques, rather than manual techniques, when it is necessary to
Examine all data in an A/P file.
Computer-assisted audit techniques are most useful in analyzing large-volume accounts such as accounts payable.
In an integrated audit, an auditor should issue an adverse opinion on the effectiveness of an entity’s internal control in which of the following situations?
A material weakness exists.
An audit of the effectiveness of internal control over financial reporting is integrated with an audit of the financial statements. If the engagement determines that a material weakness exists, the auditor should express an adverse opinion on the effectiveness of internal control (AU-C 940).
An auditor is required to obtain an understanding of the entity’s business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?
To assist the auditor to accurately interpret information obtained during an audit.
The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement. The understanding addresses, for example, (1) the nature of the entity; (2) transactions, balances, and disclosures; (3) objectives, strategies, and business risks; (4) accounting practices; and (5) financial performance. This understanding is necessary for the auditor to interpret the audit evidence obtained and to determine its sufficiency and appropriateness.
Prior to the audit, an auditor usually discusses the general audit strategy with the client’s management. Which of the following details do management and the auditor usually agree upon at this time?
The schedules and analyses that the client’s staff should prepare.
The terms of the engagement should be documented in an engagement letter that states the following: (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) the financial reporting framework, and (5) the expected form and content of audit reports. The engagement letter also includes other relevant information, such as fees, billings, and assistance to be provided by the client’s staff.
For effective internal control, the accounts payable department ordinarily should
Establish the agreement of the vendor’s invoice with the receiving report and purchase order.
The accounts payable department is responsible for matching the vendor’s invoice against the corresponding purchase order and receiving report. This procedure provides assurance that a valid transaction has occurred and that the parties have agreed on the terms, such as price and quantity.
In a purchases-payables computer system, a purchase order is created after which document has been processed?
Purchase requisition.
The shipping of inventory for sales orders and the related reduction of inventory on the inventory master file cause inventory levels to fall below the reorder point. As a result, a requisition request is transmitted to the purchasing agent. The relevant terms are stored in the inventory master file and provided to the purchasing agent who then approves the information or makes modifications based on current conditions. Once the requisition is approved, the purchase order program prints the purchase order for mailing to the vendor, records it in the open purchase order file, and authorizes the receiving department to accept the shipment.
Which of the following procedures would most likely assist an auditor in identifying related party transactions?
Review the minutes of the meetings of the board of directors and its committees.
Among the procedures for identifying related party transactions are reviews of (1) the minutes of the meetings of the board of directors and its committees; (2) filings with regulators; (3) conflict-of-interest statements; (4) transactions with major customers, suppliers, lenders, and borrowers; (5) accounting records for large, unusual, or nonrecurring transactions or balances; (6) invoices of law firms; and (7) confirmations of compensating balance arrangements.
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?
Test the operating effectiveness of such controls in the current audit.
Controls that have changed must be tested for operating effectiveness before they can be relied on.
Under the AICPA’s auditing standards, which of the following statements about an auditor’s communication of significant control deficiencies is true?
An auditor’s report on significant control deficiencies should include a restriction on the use of the report.
A communication of significant control deficiencies should (1) state that the purpose of the audit was to report on the financial statements, not to provide assurance on internal control; (2) give the definition of significant control deficiencies and material weaknesses; and (3) state that the report is intended solely for the information and use of those charged with governance, management, and others within the organization (or specified regulatory agency) and is not intended to be, and should not be, used by anyone other than the specified parties.
