2.10.19 Flashcards
Early appointment of the auditor enables preliminary work to be performed by the auditor. This benefits the client because it permits the audit to be performed in
A more efficient manner.
Early appointment of the auditor is advantageous to both the auditor and the client. Early appointment aids the auditor in planning the work, especially that to be done before the end of the year. The client benefits from more efficient scheduling of the audit and an early completion of the work after the end of the fiscal year.
Which of the following procedures would best detect a liability omission by management?
Review purchase contracts and other legal documents .
The auditor’s search for unrecorded liabilities should include reading contracts, loan agreements, leases, correspondence from governmental agencies, and any legal documents in the client’s possession.
Which of the following procedures would an auditor most likely complete to test the existence assertion for property, plant, and equipment?
Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service.
Assertions about existence address whether PPE exist at a given time. For example, observation and inspection by the auditor provide direct audit evidence that new additions exist. Vouching recorded additions to the original payment documents provides some evidence about existence, rights, and valuation.
The auditor should insist that a representative of the client be present during the physical examination of securities to
Acknowledge the receipt of securities returned.
A client representative should be present when the auditor examines the securities to acknowledge that all the securities have been returned intact. The auditor should receive a written receipt at the completion of the count to protect the auditor from claims by management that the auditor is responsible for any shortage that may have developed.
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer?
ration analysis.
Using analytical procedures, the auditor develops expectations about (predictions of) recorded balances or ratios. In analyzing relationships among balance sheet accounts, comparisons of one balance sheet account with another, or ratio analysis, would be particularly appropriate.
After issuing an auditor’s report, an auditor has no obligation to make continuing inquiries about audited financial statements unless
Information that existed at the report date and may affect the report comes to the auditor’s attention.
Although the auditor may need to extend subsequent events procedures when issuers make filings under the Securities Act of 1933 (AU-C 925, Filings with the U.S. Securities and Exchange Commission Under the Securities Act of 1933), (s)he ordinarily need not apply any procedures after the date of the report. However, facts may be discovered by the auditor after the report release date that, if known at that date, might have caused the auditor to revise the report. In this case, the auditor should (1) discuss the matter with management and (2) determine whether the statements should be revised and, if so, how management intends to address the matter in the statements (AU-C 560).
Which of the following types of audit evidence provides the least assurance of reliability?
Prenumbered receiving reports completed by the client’s employees.
The reliability of information used as audit evidence is affected by (1) its source, (2) its nature, and (3) how it is obtained. These circumstances include controls over its preparation and maintenance. Evidence is generally more reliable when it is (1) obtained from knowledgeable independent sources outside the entity, (2) generated internally by the entity under effective internal control, (3) obtained directly by the auditor, (4) in documentary form (in any medium), and (5) represented by original documents (rather than photocopies). Thus, prenumbered receiving reports completed by the client’s employees tend to be less reliable than such externally produced documents as receivable confirmations, bank statements, and tax bills.
Internal control cannot be designed to provide reasonable assurance that
Fraud will be eliminated.
Internal control is a process designed to provide reasonable assurance regarding the achievement of the entity’s objectives. It can provide reasonable assurance regarding (1) reliability of financial reporting, (2) compliance with applicable laws and regulations, and (3) effectiveness and efficiency of operations. Because of inherent limitations, however, no system can be designed to eliminate all fraud (AU-C 315).
Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client’s employees?
Prepare a schedule of accounts payable.
Preparation of schedules is usually delegated to the entity’s employees. The auditor should review and test the schedules prepared by them.
Which of the following issues related to internal control over financial reporting are required to be communicated in writing to management and those charged with governance?
I. Deficiencies in internal control
II. Significant deficiencies
III. Material weaknesses
II & III only.
Only those control deficiencies considered to be significant deficiencies or material weaknesses are required to be communicated in writing to management and those charged with governance. (But certain deficiencies should not be reported directly to management.) Other control deficiencies that merit management’s attention should be reported to management orally or in writing. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of their assigned functions, to prevent misstatements or detect and correct them on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness but merits attention by those charged with governance. A material weakness is a deficiency, or combination of deficiencies, in internal control that results in a reasonable possibility that a material misstatement of the financial statements will not be prevented, or detected and corrected, on a timely basis. A reasonable possibility means that the probability of the event is more than remote.
Wilson, CPA, obtained sufficient appropriate audit evidence on which to base the opinion on Abco’s December 31, Year 1, financial statements on March 6, Year 2, the date of the auditor’s report. A subsequently discovered fact requiring revision of the Year 1 financial statements occurred on April 10, Year 2, and came to Wilson’s attention on April 24, Year 2. If the fact became known prior to the report release date, and the revision is made, Wilson’s report ordinarily should be dated
Using duel-dating.
A subsequently discovered fact (1) becomes known to the auditor after the report date and (2) may cause the auditor to revise the report. The report date is no earlier than the date when sufficient appropriate evidence is obtained. If such a fact becomes known to the auditor before the report release date, the auditor should (1) discuss the matter with management and (2) determine whether the statements need revision (adjustment or disclosure). If management revises the statements, the auditor should perform the necessary procedures on the revision. The auditor also (1) dates the report as of a later date or (2) dual-dates the report. Dual-dating indicates that the procedures performed subsequent to the original date are limited to the revision. Unless the auditor extends subsequent events procedures to a new date (one presumably later than April 24, Year 2, the date when the subsequently discovered fact became known), the auditor should dual-date the report.
A secondary result of the auditor’s understanding of internal control for a nonissuer is that the understanding may
Bring to the auditor’s attention possible control conditions required to be communicated to the client.
The auditor is not required to search for significant deficiencies or material weaknesses in internal control. However, the auditor may identify these conditions during the audit. Significant deficiencies and material weaknesses should be communicated in writing to management and to those charged with governance (AU-C 265).
Which of the following is an advantage of electronic data interchange (EDI)?
Elimination of internal paper documents.
EDI is the communication of electronic documents directly from a computer in one entity to a computer in another entity. EDI eliminates the paper documents, both internal and external, that are the traditional basis for many audit procedures. Advantages include reduction of clerical errors, speed, and the elimination of repetitive clerical tasks. EDI also eliminates document preparation, processing, filing, and mailing costs.
When performing procedures to identify and assess the risks of material misstatement for accounting estimates, the auditor should
Obtain an understanding of how management developed its estimates.
The auditor performs risk assessment procedures to provide a basis for identifying and assessing the RMMs for accounting estimates. Thus, the auditor obtains an understanding of the following: (1) the relevant requirements of the applicable financial reporting framework, (2) how management identifies factors that create a need for estimates, and (3) how management makes estimates and the data on which they are based (e.g., methods, models, controls, use of specialists, underlying assumptions, and whether and how the effects of estimation uncertainty are assessed).
Which of the following procedures most likely will provide an auditor with sufficient evidence about whether an entity’s controls are suitably designed and have been implemented to prevent, or detect and correct, material misstatements?
observing the entity’s personnel applying the controls.
AU-C 315 states that risk assessment procedures to obtain audit evidence about the design and implementation of relevant controls may include (1) inquiry of entity personnel, (2) observing the application of specific controls, (3) inspecting documents and reports, and (4) tracing transactions through the information system relevant to financial reporting. Inquiry alone is not sufficient to evaluate the design of a control relevant to an audit and to determine whether it has been implemented.
