2.18.19 Flashcards
For a particular entity’s financial statements to be presented fairly, it is not required that
Accounting policies be applied on a basis consistent with those followed in the prior year.
A lack of consistency does not preclude fair presentation in accordance with the applicable reporting framework. For example, if the entity voluntarily changes from one accounting principle in accordance with the framework to another and the auditor concurs with the change, an emphasis-of-matter paragraph is required to be included in the auditor’s report. But the financial statements will be in accordance with the framework.
To obtain evidence about the operating effectiveness of controls, an auditor selects tests from a variety of methods, including
inquiries.
The auditor should perform other procedures in combination with inquiry to obtain evidence about the operating effectiveness of controls. Thus, inquiry by itself is not sufficient. Accordingly, inquiry combined with inspection, recalculation, or reperformance may be preferable to inquiry and observation. An observation is relevant only at a moment in time (AU-C 330). Inquiries may be formal or informal (oral). They seek information from knowledgeable people that may be financial or nonfinancial and internal or external to the entity (AU-C 500).
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
Inquire of management whether new shares have been issued since the year end.
The auditor should perform procedures with respect to material events or transactions that occur after the balance sheet date but prior to the date of the auditor’s report. Procedures that should be performed include inquiring of management and those charged with governance about whether (1) increases in capital or issuances of debt have occurred, e.g., an issue of new shares or bonds, or (2) an agreement about a merger or liquidation has been made (AU-C 560).
When a group auditor of a nonissuer decides to refer to a component auditor’s audit, the group auditor’s report should indicate clearly, in the auditor’s responsibility section, the
Magnitude of the portion of the financial statements audited by the component auditor.
When the group engagement partner decides to refer to the report of a component auditor, the report on the group statements should clearly indicate that the component was not audited by the group auditor. It also should state (1) that the component was audited by the component auditor and (2) the magnitude of the portion of the statements audited. This language is included in the auditor’s responsibility section of the report.
Which of the following are considered control environment factors?
Detention risk:
HR policies and procedures:
no
yes
Human resource policies and practices are part of the control environment. These policies and practices relate to recruitment, orientation, training, evaluating, counseling, promoting, compensating, and remedial actions. The control environment is the component that sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for the other components.
A conceptually logical approach to the auditor’s consideration of relevant controls consists of the following four steps:
I. Determine whether the relevant controls are capable of preventing, or detecting and correcting, material misstatements and have been implemented.
II. Evaluate the operating effectiveness of relevant controls.
III. Assess the risks of material misstatement.
IV. Design further audit procedures.
What is the most logical order in which these four steps are performed?
I, III, IV, II.
When obtaining an understanding of internal control, the auditor should perform risk assessment procedures to evaluate the design of relevant controls and to determine whether they have been implemented. This understanding is used to (1) identify types of misstatements, (2) identify factors affecting the risks of material misstatement, and (3) design further audit procedures. After obtaining the understanding, the RMMs should be assessed. In response to the risk assessment, the auditor designs further audit procedures. If the auditor relies on controls (has an expectation of their operating effectiveness), (s)he should perform tests of controls to evaluate their operating effectiveness (AU-C 315 and AU-C 330). Thus, the most logical order of the listed steps is the following:
Evaluate the design of relevant controls and determine whether they have been implemented,
Assess the RMMs,
Design further audit procedures, and
Test controls.
An auditor should obtain written representations from management about litigation, claims, and assessments. These representations may be limited to matters that are considered either individually or collectively material provided an understanding on the limits of materiality for this purpose has been reached by
management and the auditor.
Management’s representations may be limited to matters that are considered individually or collectively material if management and the auditor have reached an understanding about materiality. Such limitations do not apply to certain representations not directly related to amounts in the financial statements, e.g., acknowledgment of responsibility for fair presentation, availability of records, and fraud involving management and persons with significant roles in internal control.
An auditor most likely should test for the presence of unauthorized computer program changes by running a
Source code comparison system.
The best way to test for unauthorized computer program changes is to examine the program itself. By comparing a program under his or her control with the program used for operations, the auditor can determine whether unauthorized changes have been made.
Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?
The destruction of accounting records.
When the auditor cannot obtain sufficient appropriate evidence, (s)he expresses a qualified opinion if the possible effects are material but not pervasive. If the possible effects are material and pervasive, (s)he disclaims an opinion. An inability to obtain sufficient appropriate evidence may result from (1) circumstances beyond the control of the entity, (2) circumstances related to the nature or the timing of the work, or (3) a management-imposed limitation. They result in either a qualified opinion or a disclaimer. Circumstances beyond the control of the entity include (1) destruction of accounting records or (2) indefinite governmental seizure of accounting records (AU-C 705).
Which of the following statements ordinarily is included among the written management representations obtained by the auditor in an audit of a nonissuer?
All transactions have been recorded in the accounting records.
AU-C 580 lists the concerns ordinarily addressed in management representation letters, if applicable. The list includes disclosures about the recording of all transactions.
An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as of October 31. By this procedure, the auditor would be most likely to learn of which of the following?
An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
By reconciling the accounts receivable ledger to the general ledger control account, transfer misstatements will be identified.
An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern?
management’s plan for disposal of assets.
If the auditor believes that a substantial doubt exists, (s)he considers management’s plans for responding to the adverse effects of the conditions and events indicative of a substantial doubt. Among the considerations are (1) disposing of assets, (2) borrowing money or restructuring debt, (3) reducing or delaying expenditures, and (4) increasing ownership equity.
Controls within the computer processing activity may leave no visible evidence indicating that they were implemented and were effective. In such instances, the auditor most likely would test these controls by
Reviewing transactions submitted for processing and comparing them with related output.
The auditor should use tests of controls to obtain assurance that necessary controls are operating effectively at the assertion level. When automated controls leave no visible evidence (no visible audit trail), tests include reviewing transactions submitted for processing and comparing the expected results with the related output to determine that unacceptable conditions were reported and properly resolved. The auditor may need to audit through the computer to accomplish this purpose.
Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?
Preliminary judgements about materiality levels.
Judgments about materiality will affect the sample sizes in a variables sampling plan. The smaller the levels of materiality, the larger the sample sizes needed to support the auditor’s conclusions.
The auditor is least likely to learn of retirements of equipment through which of the following?
review of the purchase return and allowance account.
Review of the purchase return and allowance account provides no audit evidence about the retirement of equipment. This account records the return of purchased inventory and is unaffected by the entries to record the acquisition, depreciation, and disposition of fixed assets. To detect unrecorded retirements, the auditor should determine whether (1) the entity uses special sequentially numbered forms to authorize and record such transactions and (2) regular physical inventories of equipment are taken. Inquiry of appropriate personnel should be made. Major additions should be investigated to determine the fate of old equipment. Reduction in insurance coverage also may indicate a retirement of equipment. Finally, miscellaneous revenue accounts may furnish clues of otherwise unrecorded dispositions.
