1.27.19 Flashcards
Immediately upon receipt of cash, a responsible employee should
Prepare a remittance listing.
Effective control of cash requires that receipts be recorded promptly. For mail receipts, a listing of remittance advices by an employee not performing incompatible functions is a standard control procedure. If the customer does not return the remittance advice, one should be prepared at the time the mail is opened. If remittance advices are not used, a listing of receipts should still be made when the mail is opened.
A service organization provides processing services for a client’s sales orders. Which of the following information is relevant when gathering data for the report on the service organization’s internal controls?
The service organization’s system calculates accounts receivable balances.
The auditor should obtain an understanding of the nature and significance of the services provided by the service organization and their effect on the user entity’s internal control relevant to the audit. The understanding should be sufficient to identify and assess the risks of material misstatement. By understanding how the service organization’s system calculates accounts receivable, the auditor can evaluate the associated internal controls.
In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence?
A factor for an auditor to consider when designing confirmation requests is the assertion being tested.
The following factors affecting the design of the external confirmation request directly relate to the response rate and the reliability of the evidence obtained: (1) the assertions addressed; (2) specific RMMs, including fraud risks; (3) presentation of the request and method of communication; (4) management’s authorization to confirming parties; (5) prior experience on the audit; and (6) ability of the confirming parties to confirm or provide the information.
Determining that controls are operating effectively most likely involves
Identifying specific controls relevant to specific assertions.
The auditor obtains an understanding of internal controls to evaluate their design and determine whether they have been implemented (AU-C 315). Tests of controls are performed only on controls that are suitably designed to prevent, or detect and correct, a material misstatement in a relevant assertion (AU-C 330).
An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in communication to the
board of directors.
When the audit indicates the presence of error or fraud that requires a modification of the opinion, and the client refuses to accept the auditor’s report as modified, the auditor should withdraw and communicate the reasons for withdrawal to the audit committee of the board. Withdrawal may or may not be appropriate in other circumstances, depending on the cooperation of management and the board.
For several years a client’s physical inventory count has been lower than what was shown on the books at the time of the count, and downward adjustments of the inventory account have been required. Contributing to the inventory problem could be material weaknesses in internal control that led to the failure to record some
Purchase returns to vendors.
Purchases returned to the vendor but not recorded overstate inventory records. The goods are reflected in inventory but are not on hand.
In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than individual invoices. Which of the following most likely will be included with the client’s confirmation letter?
A client-prepared statement of account showing the details of the customer’s account balance.
A confirmation request should contain management’s authorization to the confirming party to respond. Also, an external confirmation should be requested by the client because the receiving party has no relationship with the client’s auditor. In confirming the customer’s account balance, display of the details of the balance will likely help the customer in reconciling the amount and may increase response rates. The auditor, however, will send the request directly to the customer, who will be requested to send the response directly to the auditor.
Which of the following types of evidence would an auditor most likely consider to determine whether internal controls are operating effectively?
A questionnaire completed by an employee in the receiving department concerning her duties and responsibilities.
Tests of controls are directed toward operating effectiveness. They include inquiries of entity personnel (e.g., a questionnaire completed by an employee in the receiving department); inspection of documents, reports, and electronic files indicating performance of the controls; observation of the application of the controls; and reperformance of the controls by the auditor.
Snow, CPA, was engaged by Master Co., a nonissuer, to audit the effectiveness of Master’s internal control over financial reporting as part of an integrated audit. Snow’s report should state that
Because of inherent limitations, internal control may not prevent, or detect and correct, misstatements.
The auditor’s report states that because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that (1) controls may become inadequate because of changes in conditions or (2) the degree of compliance with the policies or procedures may deteriorate (AU-C 940).
After identifying a significant related party transaction outside the entity’s normal course of business, an auditor should
Evaluate the business purpose of that transaction.
The auditor should inspect any contracts or agreements to evaluate whether (1) the business purpose (or lack of a business purpose) implies that the transaction’s intent was fraudulent, (2) the terms are consistent with management’s explanations, and (3) the accounting and disclosure are appropriate. The auditor also should obtain evidence of appropriate authorization and approval.
A client installed sophisticated controls using the biometric attributes of employees to authenticate user access to the computer system. This technology most likely replaced which of the following controls?
Passwords.
The use of passwords is an effective control in an online system to prevent unauthorized access to computer systems. However, biometric technologies are more sophisticated and difficult to compromise.
Which of the following would be the best protection for a company that wishes to prevent the lapping of trade accounts receivable?
Have customers send payments directly to the company’s depository bank.
Lapping is the delayed recording of cash receipts to cover a cash shortage. Current receipts are posted to the accounts of customers who paid one or two days previously to avoid complaints (and discovery) when monthly statements are mailed. The best protection is for the customers to send payments directly to the company’s depository bank. This procedure precludes client personnel from having access to the money.
In a purchases-payables computer system, control activities implemented to ensure proper input include
Preformatted screens.
In a purchases-payables computer system, control activities implemented to ensure proper input include
Which of the following procedures represents a weakness in internal control for payroll?
The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.
Separating paycheck preparation from distribution makes it more difficult for fictitious employees to receive payment. In principle, the payroll function should be divided into its authorization, recording, and custody functions. Authorization of hiring, wage rates, and deductions is provided by personnel. Authorization of hours worked is provided by production. Based upon these authorizations, accounting (the payroll department) calculates and records the payroll and prepares checks. The CFO signs and distributes payroll checks. Consistent with its asset custody function (possession of checks, cash, or electronic transfer codes), the CFO should distribute paychecks or cash in a manual system (or make EFTs in a computerized system) so as to prevent payments to fictitious employees. Furthermore, the CFO rather than the payroll department should receive unclaimed paychecks (or cash) for safeguarding. Moreover, incomplete EFTs should not be returned to any of the other functions.
Which of the following statements is true about an auditor’s communication with those charged with governance?
This communication should include management changes in the application of significant accounting policies.
The auditor should communicate to those charged with governance, among other things, management’s selection of and changes in significant accounting policies or their application. The auditor also should determine that those charged with governance are informed about the methods used to account for significant unusual transactions and the effects of significant accounting policies in controversial or emerging areas (AU-C 260).
