1.8.19 Flashcards
Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?
Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.
The auditor may accept the engagement if (s)he can obtain sufficient appropriate evidence by performing alternative procedures, e.g., tests of prior transactions affecting inventory or reviews of the records of prior counts.
In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally is concerned about assumptions that are
Susceptible to bias.
In evaluating the reasonableness of an estimate, the auditor normally concentrates on key factors and assumptions that are (1) significant to the accounting estimate, (2) sensitive to variations, (3) deviations from historical patterns, and (4) subjective and susceptible to misstatement and bias.
The auditor’s evaluation of the reasonableness of accounting estimates
Considers that management bases its judgment on both subjective and objective factors.
Estimates are based on both subjective and objective factors. Thus, control over estimates may be difficult to establish. Given the potential bias in the subjective factors, the auditor should adopt an attitude of professional skepticism toward both the subjective and objective factors.
Which of the following is required for a CPA firm to designate itself as “Members of the American Institute of Certified Public Accountants” on its letterhead?
All CPA owners are members.
The Form of Organization and Name Rule states that a firm may not use the quoted designation unless all of its CPA owners are members of the AICPA.
Which of the following statements is correct regarding the auditor’s consideration of the possibility of noncompliance with laws and regulations by clients?
If specific information concerning noncompliance with laws and regulations comes to the auditor’s attention, the auditor should apply audit procedures specifically directed to ascertaining whether an act of noncompliance has occurred.
Instances of noncompliance are violations of laws or governmental regulations that do not include personal misconduct by the client’s personnel unrelated to their business activities. The auditor’s responsibility for detection of misstatements arising from noncompliance having direct and material effects is the same as that for material errors and fraud. If information comes to the auditor’s attention concerning noncompliance, the auditor should apply specific audit procedures to determine whether an act of noncompliance has occurred.
Analytical procedures are required for which of the following?
Audit planning.
An audit plan based on the audit strategy must be developed and documented for all audit engagements. It includes the nature, timing, and extent of procedures expected to reduce audit risk to an acceptably low level. Thus, the audit plan includes a description of risk assessment procedures. Risk assessment procedures are performed to obtain an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement (RMMs) at the levels of (1) the financial statements as a whole and (2) relevant assertions. Risk assessment procedures include (1) inquiries of management and others within the entity, (2) analytical procedures, and (3) observation and inspection. The auditor also may perform other appropriate procedures, such as inquiring of external parties (e.g., legal counsel) or reviewing externally generated information (e.g., financial publications). Analytical procedures may be applied not only as risk assessment procedures (analytical procedures used to plan the audit) but also as substantive procedures. These are procedures (tests of details and analytical procedures) designed to detect material misstatements at the assertion level.
Each of the following is a type of known misstatement, except
Differences between management and the auditor’s judgment regarding estimates.
Known misstatements are specifically identified during the audit. In contrast with known misstatements, the amount of likely misstatements cannot be specifically identified. A likely misstatement may derive from differences between the auditor’s and management’s judgments about accounting estimates or extrapolations from audit evidence.
In general, fraudulent financial reporting perpetrated by which of the following are most difficult to detect?
Controller.
Regarding detection of fraudulent data, the level of involvement often influences the auditor’s ability to detect. Thus, fraud may be perpetrated by a level of management that is above specific controls or that can override the controls with relative ease. Because the controller is the chief accounting officer, (s)he is especially well placed to manipulate records to conceal wrongdoing.
During consideration of internal control in a financial statement audit, an auditor is not obligated to
Search for significant deficiencies in the operation of internal control.
The auditor should obtain an understanding of the entity and its environment, including its internal control, and assess the risks of material misstatement. The limited purpose of this consideration does not include the search for significant deficiencies or material weaknesses.
A CPA wishes to determine how various issuers have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information?
AICPA Accounting trends & topics.
Practical guidance for accounting and auditing engagements can be found in various nonauthoritative publications. An example is Accounting Trends and Techniques, which describes current practice regarding corporate financial accounting and disclosure policies. It is a useful source for practitioners in industry and public practice. This annual AICPA publication is based on a survey of the annual financial reports of over 600 public companies.
Which of the following statements about internal control is correct?
The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
Internal control reflects the quantitative and qualitative estimates and judgments of management in evaluating the cost-benefit relationship. The cost of internal control should not exceed its benefits. Although the cost-benefit relationship is a primary criterion in designing controls, precise measurement of costs and benefits is usually impossible.
As part of the audit of fair value estimates and disclosures, an auditor may need to test the entity’s significant assumptions. In these circumstances, the auditor should
Evaluate whether the assumptions individually and as a whole form a reasonable basis for the fair value estimates.
Observable market prices are not always available for fair value estimates. In this case, the entity uses valuation methods based on the assumptions that the market would employ to estimate fair values, if obtainable without excessive cost. Accordingly, GAAS require the auditor to evaluate whether the significant assumptions form a reasonable basis for the estimates. Because assumptions often are interdependent and must be consistent with each other, the auditor should evaluate them independently and as a whole.
The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity. Objectivity in the Code refers to a CPA’s ability
To maintain an impartial attitude on all matters that come under the CPA’s review.
According to the Principles, “Objectivity is a state of mind, a quality that lends itself to a member’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.”
Audit planning for an initial audit most likely includes
Performing procedures involving opening balances.
First-year audits involve additional planning considerations. Examples are (1) communication with the predecessor auditor, (2) audit procedures regarding opening balances, (3) assignment of firm personnel with appropriate qualifications, and (4) procedures required by the firm’s system of quality control for initial engagements.
Which of the following statements best describes an auditor’s responsibility to detect fraud or error?
An auditor should design an audit to provide reasonable assurance of detecting fraud or error that is material to the financial statements.
The auditor has a responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by fraud or error (AU-C 240). Thus, the consideration of fraud should be logically integrated into the overall audit process in a manner consistent with other pronouncements, e.g., those on planning and supervision, audit risk and materiality, and internal control. This consideration entails (1) understanding fraud, (2) discussing fraud risks with members of the engagement team, (3) obtaining information needed to identify fraud risks, (4) identifying those risks, (5) assessing fraud risks, (6) responding to the assessments, (7) evaluating evidence at the end of the audit, (8) making appropriate communications about fraud, and (9) documenting the consideration.
