2.18.19 Flashcards
The auditor should perform tests of controls when the auditor’s assessment of the risks of material misstatement includes an expectation of the operating effectiveness of internal control or when
Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level.
For some RMMs, the auditor may determine that it is not feasible to obtain sufficient appropriate audit evidence only from substantive procedures. These RMMs may relate to routine, significant transactions subject to highly automated processing with no documentation except what is recorded in the IT system. In such circumstances, the controls over the RMMs are relevant to the audit. Thus, the auditor should obtain an understanding of, and test, the controls.
An annual shareholders’ report includes audited financial statements and contains a management report asserting that the financial statements are the responsibility of management. Is it permissible for the auditor’s report to refer to the management report?
No, because the reference may lead to the belief that the auditor is providing assurances about management’s representations.
According to AU-C 700, such a reference in the auditor’s report may lead users to the erroneous belief that the auditor is giving assurances about management’s representations in the separate statement in the annual report.
When an issuer refuses to include in its audited financial statements the segment disclosures that the auditor believes are required, the auditor should express a(n)
Qualified opinion because of inadequate disclosure.
If the statements are materially misstated because of the omission of required information, the auditor should modify the opinion for inadequate disclosure and describe the information omitted. The auditor also should include this information in the report, if practicable. But the auditor is not expected to prepare segment information. (S)he need not assume the position of a preparer of financial information.
For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting employee time cards for proper approval by supervisors.
The auditor uses attribute sampling to test the effectiveness of controls. Attribute sampling enables the auditor to estimate the occurrence rate of deviations and to determine its relation to the tolerable deviation rate. Thus, a control, such as proper approval of time cards by supervisors, can be tested for effectiveness using attribute sampling.
Which of the following events requires adjustment to the financial statements for the year ended December 31, Year 1?
Loss on an accounts receivable as the result of a customer suffering a deteriorating financial condition that led to bankruptcy filing in January Year 2.
A loss is probable because an asset (a receivable) was impaired at the balance sheet date as a result of the bankruptcy filing in January Year 2. A loss is accrued if it can be reasonably estimated. A loss must be disclosed in the notes if it is probable and reasonably possible.
An auditor’s decision concerning whether to dual date the audit report is based upon the auditor’s willingness to
Extend auditing procedures.
When a subsequent event disclosed in the financial statements occurs after the date of the auditor’s report but before the release of the auditor’s report, the auditor may use dual dating. (S)he may date the report as of the original report date except for the matters affected by the subsequent event, which would be assigned the appropriate later date. In that case, the auditor’s responsibility for events after the original report date would be limited to the specific event. If the auditor is willing to accept responsibility to the later date and accordingly extends subsequent events procedures to that date, the auditor may choose the later date as the date for the entire report.
Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
Notes receivable and interest income.
The auditor analyzes information and presents the analysis for related accounts on the same working paper. Notes receivable and interest on them are such related accounts.
The most effective audit procedure for determining the collectibility of an account receivable is the
Review of the subsequent cash collections.
Collectibility pertains to the assertion of valuation. It is the principal issue with regard to the adequacy of the allowance for doubtful accounts. The best way to determine collectibility is to learn whether the receivable was subsequently collected. A confirmation provides evidence that a contract exists and that the debtor acknowledges the debt, but the subsequent collection of the receivable is the only means of gaining complete assurance that the amount will be paid.
Many of the Granada Corporation’s convertible bondholders have converted their bonds into stock during the year under audit. The independent auditor should review the Granada Corporation’s statement of cash flows and related disclosures to ascertain that they show
The issuance of the stock and reduction in convertible debt.
Information about noncash financing and investing activities must be reported in related disclosures but not on the face of the statement of cash flows. Exclusion of such transactions from the statement avoids complicating it and emphasizes the entity’s cash receipts and payments. The issuance of stock and the reduction of convertible debt should therefore be disclosed in a related but separate schedule. All financing (and investing) activities during the period should be reported, including those that do not directly affect cash.
In testing the existence assertion for an asset, an auditor ordinarily works from the
Accounting records to the supporting evidence.
The existence assertion concerns whether assets, liabilities, or equity interests of the entity exist at a given time. The direction of testing is ordinarily from the accounting records to the supporting evidence, often including direct observation of the asset. Thus, the auditor selects from items contained in a financial statement amount and searches for appropriate (relevant and reliable) evidence that is sufficient.
Which of the following statements best describes the distinction between the auditor’s responsibilities and management’s responsibilities?
The auditor’s responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management.
The auditor is responsible for the opinion on financial statements, but management is responsible for the representations made in the financial statements.
In which of the following should an auditor’s report on the audit of a nonissuer stating an unmodified opinion refer to the lack of consistency when a material change in accounting principle has occurred?
An emphasis-of-matter paragraph following the opinion paragraph.
The auditor should evaluate a change in principle to determine whether (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable framework, (2) the disclosures related to the change are adequate, and (3) the entity has justified that the alternative principle is preferable. If the criteria stated above are met, and the change in principle is material, the auditor should include an emphasis-of-matter paragraph in the report. This paragraph (1) describes the change, (2) refers to the entity’s disclosures, and (3) follows the opinion paragraph.
In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or
Confirm the number of shares owned that are held by an independent custodian.
To test the existence assertion and the rights and obligations (ownership) assertion, the auditor should perform one or more of the following procedures, depending on the nature of the investments and the assessment of audit risk: (1) inspection; (2) external confirmation by the issuer, custodian, or counterparty; (3) external confirmation of unsettled transactions by the broker-dealer; or (4) reading partnership or similar agreements. Thus, brokers, banks, agents, or others holding securities for the client should be requested by the client to respond directly in writing to the auditor’s confirmation requests.
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
Management does not provide reasonable justification for a change in accounting principles.
When management does not provide reasonable justification for a change in accounting principles, a qualified or adverse opinion should be expressed if the effect is a material misstatement.
When an auditor qualifies an opinion on the financial statements of a nonissuer because of a scope limitation, which part(s) of the auditor’s report should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself?
The opinion paragraph only.
When a qualified opinion results from an inability to obtain sufficient appropriate evidence in an audit of a nonissuer, the auditor describes the matter in the basis for qualified opinion paragraph, not in a note to the statement. The description of the audit scope is the responsibility of the auditor, not management. The opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements, not to the scope limitation itself. The wording “. . . except for the possible effects of the matter described in the basis for qualified opinion paragraph . . .“ is appropriate. The following are the other effects on the auditor’s report when the opinion is qualified due to an inability to obtain sufficient appropriate evidence with possible effects that are material but not pervasive: (1) The introductory paragraph is unchanged; (2) the management’s responsibility paragraph is unchanged; and (3) the auditor’s responsibility section ends with the sentence, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.”
