1.30.19 Flashcards
In creating lead schedules for an audit engagement, a CPA often uses automated audit documentation software. What client information is needed to begin this process?
General ledger information, such as account numbers, prior-year account balances, and current-year unadjusted information.
Lead schedules are summaries of detailed schedules. To create these summaries, general ledger information is needed. A lead schedule contains the detailed accounts from the general ledger making up the line item total. For example, a cash lead schedule may summarize findings recorded on the cash in bank, petty cash, and count-of-cash-on-hand detail schedules.
While performing interim audit procedures on accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?
Use more experienced audit team members to perform year-end testing.
The higher the risk assessment, the more persuasive the audit evidence should be. Audit evidence should be sufficient and appropriate. Sufficiency relates to quantity and appropriateness to relevance and reliability. To obtain more persuasive evidence, the auditor may increase its quantity or obtain evidence that is more relevant or reliable. The higher the risk assessment, the more likely that performing substantive procedures at or near to period-end is more effective (results in more reliable evidence) than performing them at an interim date. Moreover, assigning more experienced audit team members may result in obtaining more reliable evidence because of their greater competence. Using more experienced audit team members is an example of an overall response to the risk assessment.
Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
Comparing the financial statements with anticipated results.
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.
When assessing an internal auditor’s objectivity, an auditor should
Consider the organizational level to which the internal auditor reports.
If the external auditor plans to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, their 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.
Tests of controls in an advanced computer system
Can be performed using actual transactions or simulated transactions.
Tests of controls, that is, determining whether the prescribed controls are operating effectively at the assertion level, can be performed using either actual or simulated transactions. For example, the integrated test facility (ITF) method uses both actual and simulated transactions.
Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents’ delinquent real estate taxes. Internal control at the municipality is ineffective. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely
Send positive confirmation requests.
The presumption that the auditor will request confirmation of receivables cannot be overcome unless (1) the receivables are not material, (2) external confirmation requests are unlikely to be effective, (3) the assessed risks of material misstatement are low, and (4) other planned substantive procedures apply to the assessed risks. None of these conditions apply. Thus, the auditor should confirm the receivables. However, negative confirmation requests are not used unless the assessed risks of material misstatement are low. Because the municipality’s internal control is ineffective, the auditor should send positive confirmation requests.
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
Preparation of system flowcharts.
System flowcharts provide an overall view of the inputs, processes, and outputs of a system. If internal control is complex, the auditor may use flowcharts, questionnaires, or decision tables to document the understanding of internal control. However, tests of controls (tests of operating effectiveness) are concerned with (1) the manner in which controls were applied, (2) the consistency of application, (3) by whom or by what means they were applied, (4) whether the controls depend on other controls (indirect controls), and (5) the time or period for which the auditor intends to rely on the controls (AU-C 330).
Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed?
Search for unrecorded cash receipts.
GAAS do not specifically require a search for unrecorded cash receipts. Given a low assessed RMM, the auditor might decide to reduce the audit effort devoted to substantive tests of assertions about cash and omit the procedure.
AU-C 402, Audit Considerations Relating to an Entity Using a Service Organization, applies to a financial statement audit of an entity that uses services of another organization as part of its information system. For this purpose, the user auditor may need to obtain a service auditor’s report. Which of the following is a true statement about a service auditor’s report?
It should include an opinion.
A service auditor’s report should be helpful in providing a sufficient understanding to plan the audit of the user organization. The service auditor’s report may express an opinion on the fairness of the description of the controls implemented at the service organization and whether they were suitably designed. If the service auditor also has tested controls, the report may express an opinion on the operating effectiveness of the controls.
Miller Retailing, Inc., maintains a staff of three full-time internal auditors. The independent auditor has found that they are competent and objective. Moreover, the work of the internal auditors is relevant to the audit, and it is efficient to consider how that work may affect the audit. The independent auditor most likely will
Nevertheless need to make direct tests of assertions about material financial statement amounts for which the risks of material misstatement are high.
The auditor has the sole reporting responsibility and makes all judgments about matters affecting the report. When amounts are material and the risks of material misstatement are high or the evaluation of the evidence is highly subjective, the consideration of the internal auditors’ work cannot alone reduce audit risk to an acceptable level. Thus, direct testing of those assertions by the auditor cannot be eliminated (AU-C 610).
Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?
Select more effective substantial procedures.
The nature, timing, and extent of the auditor’s further audit procedures should respond to the assessed RMMs at the relevant assertion level. The greater the assessed RMMs, the more persuasive audit evidence should be. To obtain more persuasive audit evidence, the auditor may increase its quantity or obtain evidence that is more relevant or reliable. Accordingly, for high RMMs, the evidence should be more appropriate (relevant and reliable), and the auditor should select more effective substantive procedures.
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of
Valuation and allocation.
Assertions about valuation and allocation concern whether financial statement components have been included at appropriate amounts in accordance with the applicable financial reporting framework. For example, management asserts that trade accounts receivable are stated at net realizable value (gross accounts receivable minus allowance for uncollectible accounts). Aging the receivables is a procedure for assessing the reasonableness of the allowance.
Which of the following statements is an auditor most likely to add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipient?
“If you do not report any differences within 15 days, it will be assumed that this statement is correct.”
An issue with respect to negative confirmation requests is whether recipients are likely to disregard them (AU-C 505). Providing a time limit encourages a recipient to respond in a timely manner.
To establish illegal “slush funds,” corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from
Scrap sales.
Because scrap sales often provide little documentary evidence to corroborate cash receipts, it is difficult to detect abstraction of proceeds from unrecorded sales.
The appropriateness of evidence available to an auditor is least likely to be affected by the
Sampling method employed by the auditor to obtain a sample of such evidence.
Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. The sample selection method does not affect the appropriateness of evidence as long as the sample is representative of the population.
