2.20.19 Flashcards
Which of the following statements correctly describes the “top-down approach” used during an audit of internal control over financial reporting?
Begin by understanding the overall risks to internal control over financial reporting at the financial statement level.
The auditor begins an integrated audit at the financial statement level by understanding the overall risks to internal control over financial reporting and focusing on entity-level controls. The auditor then performs procedures on significant classes of transactions, account balances, disclosures, and their relevant assertions.
All of the following statements about financial statements prepared in accordance with a reporting framework generally accepted in another country and intended for use in the U.S. are true except
The auditor expresses an opinion on whether the financial statements are presented fairly within the framework of the U.S.
The auditor expresses an opinion on whether the financial statements are presented fairly within the framework of the other country, not the U.S.
Subsequent to the issuance of the financial statements, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts The auditor most likely should
Determine whether persons are relying or likely to rely on the financial statements who would attach importance to the information.
If the financial statements have been issued, they have been made available to third parties, along with the auditor’s report. Accordingly, the auditor should (1) discuss the matter with management (and, possibly, those charged with governance); (2) determine whether the statements need revision; and (3) if so, inquire how management intends to address the matter. To determine whether revision is needed, the auditor considers (1) the applicable reporting framework and (2) whether persons are currently relying or likely to rely on the statements who would attach importance to the subsequently discovered facts (AU-C 560).
After the date of the report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless
Information, which 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).
The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of
GAAP
Reporting standards require the auditor to state whether the audited entity’s financial statements are presented in conformity with GAAP. Without an applicable reporting framework, the auditor would have no uniform standard for judging fairness of presentation.
Grant Company’s financial statements adequately disclose uncertainties that concern future events, the outcome of which are not susceptible to reasonable estimation. The auditor’s report should include a(n)
Unmodified opinion.
An auditor assesses whether management’s assertions about uncertainties are supported by sufficient appropriate audit evidence. This judgment is based on the evidence that is, or should be, available. Thus, in the absence of (1) an inability to obtain sufficient appropriate evidence or (2) a material misstatement, an uncertainty does not require modification of the report.
Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?
Extraordinary repairs have lengthened the life of an asset.
If extraordinary (major) repairs have lengthened the life of an asset without improving its quality or quantity, the entity may reduce the amount of accumulated depreciation to increase the net carrying amount of the asset. This practice is acceptable for representing the increased life of an asset. It also is often used to account for replacements.
The auditor can best verify a client’s bond sinking-fund transactions and year-end balance by
Confirmation with the bond trustee.
The bond trustee is an outside, independent agent responsible for maintaining subsidiary ledgers and paying dividends. (S)he also often keeps the sinking-fund accounts. Consequently, the auditor should verify bond sinking-fund transactions with this trustee.
Which of the following groups is considered a subgroup ordinarily charged with assisting the board of directors in fulfilling its oversight responsibilities?
Audit committee.
The audit committee is a subgroup of the board of directors that is responsible for the oversight of financial reporting.
Analytical procedures can best be categorized as
Substantive procedures.
Substantive procedures are designed to detect material misstatements at the assertion level. According to AU-C 520, Analytical Procedures, analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor.
Which of the following statements is ordinarily true about the reliability of evidence?
The more effective internal control, the more assurance it provides about the reliability of the accounting data and financial statements.
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 (AU-C 500).
The primary source of information to be reported about litigation, claims, and assessments is the
Client’s management.
According to AU-C 501, “Management is responsible for adopting policies and procedures to identify, evaluate, and account for litigation, claims, and assessments as a basis for the preparation of financial statements in accordance with the requirements of the applicable financial reporting framework.” The auditor should discuss with management its policies and procedures for identifying and evaluating these matters.
In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about the
Quality of the internal auditor’s documentation.
In assessing the competence of an internal auditor, the auditor should consider such factors as (1) educational level and professional experience; (2) professional certification and continuing education; (3) audit policies, programs, and procedures; (4) supervision and review of the internal auditor’s activities; (5) practices regarding assignments; (6) quality of documentation, reports, and recommendations; and (7) evaluation of the internal auditor’s performance.
An audit supervisor reviewed the work performed by the staff to determine if the audit was adequately performed. The supervisor accomplished this by primarily reviewing which of the following?
Working papers.
Audit documentation (working papers) should be prepared to provide a clear understanding of the work performed, the audit evidence obtained and its source, and the conclusions reached.
In connection with the audit of a current issue of bonds payable, the auditor should
Ascertain that the client has obtained the opinion of counsel on the legality of the issue.
An audit of noncurrent debt (1) determines that all noncurrent debt has been recorded and constitutes bona fide liabilities; (2) verifies that federal and state laws relevant to financial reporting have been complied with; (3) determines that premium, discount, interest payable, and interest expense are accurately recorded; (4) monitors compliance with debt contracts; and (5) reviews proper presentation and disclosure in the financial statements. The auditor therefore should determine that the client has obtained the opinion of a lawyer on the legality of the bond issue.
