2.21.19 Flashcards
An auditor has been assigned to take a monetary-unit sample of a population of vouchers in the purchasing department. The population has a total recorded amount of $300,000. The auditor believes that a maximum misstatement of $900 is acceptable and would like to have 95% confidence in the results. (The confidence factor at 95% and zero misstatements = 3.00.) Additional information is provided in the opposite column.
In examining the sample, one overstatement was detected causing an extension of $270 to the tolerable misstatement. Assuming a sample size of 1,000 and assuming that the maximum dollar amount of overstatement, if no misstatements were found, was established to be $900 before the sampling analysis, what conclusion can the auditor now make from the sampling evidence?
(S)he is 95% confident that the dollar amount of overstatement in the population of vouchers is less than $1,170.
Had the auditor detected no misstatements in the sample, (s)he could have been 95% confident that the dollar amount of overstatement in the balance was less than $900. Given discovery of an overstatement causing an extension to the tolerable misstatement of $270, the auditor can conclude with 95% confidence that the overstatement is less than $1,170 ($900 + $270).
When a certified public accountant who is not independent is associated with financial statements, (s)he is precluded from expressing an opinion because
Any auditing procedures (s)he might perform will not be in accordance with generally accepted auditing standards.
An auditor is associated with financial information when (s)he applies procedures that suffice to report in accordance with GAAS. The auditor must be independent of the entity when performing an engagement in accordance with GAAS unless (1) GAAS provide otherwise or (2) the auditor is required by law to accept and report on the engagement. Barring one of the exceptions, an auditor who is not independent must not report under GAAS. Independence means independence in fact and appearance (AU-C 200). This crucially important quality gives credibility to the auditor’s opinion. If an auditor does not maintain the appearance of independence, however unbiased (s)he may be in fact, the public will be reluctant to believe that (s)he is unbiased.
Audit plans are modified to suit the circumstances of particular engagements. A complete audit plan for an engagement usually should be developed
After the auditor has obtained an understanding of existence internal control.
The effectiveness of a client’s internal control has an inverse relationship with the evidence that must be gathered to support an opinion. Only after the understanding of the entity and its environment, including its internal control, is obtained and the risks of material misstatement have been assessed can the auditor determine the nature, timing, and extent of further audit procedures (AU-C 315).
Reports are considered reports on financial statements prepared in accordance with a special purpose framework when issued in conjunction with
Compliance with aspects of regulatory requirements related to audited financial statements.
Special purpose frameworks include (1) the cash basis used to record cash receipts and cash payments, (2) the tax basis used to file income tax returns, (3) the regulatory basis used to comply with the requirements of a regulatory agency, (4) the contractual basis used to comply with an agreement between the entity and a third party, and (5) an other basis consisting of definite criteria that are (a) logical and reasonable and (b) applied to all material items.
When using sampling for substantive tests of details, the auditor is required to do all but which of the following?
Compute the sample standard deviation.
AU-C 530 does not require that the sample standard deviation be calculated. The computation would be necessary if parametric statistical sampling were used, but statistical sampling is not required by AU-C 530.
As a result of tests of controls, an auditor underrelies on controls. This incorrect assessment most likely occurred because
Operating effectiveness based on the auditor’s sample is less than the true operating effectiveness of the controls.
The risk of underreliance is that the auditor erroneously concludes that controls are less effective than they actually are. This type of error affects audit efficiency because it generally requires additional work to correct the first conclusion (AU-C 530).
An auditor may provide an issuer client any of the following nonaudit services without impairing independence and without obtaining the preapproval of the audit committee, except
Nonaudit services to perform financial information systems design and implementation.
The Sarbanes-Oxley Act of 2002 prohibits a registered public accounting firm from performing the following nonaudit services for an issuer: (1) bookkeeping or other services related to the accounting records or financial statements of the audit client; (2) design and implementation of financial information systems; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resource services; (7) broker or dealer, investment adviser, or investment banking services; (8) legal services and expert services unrelated to the audit; and (9) any other service that the Board determines is impermissible. But a registered public accounting firm may engage in any nonaudit service, including tax services other than those listed, if the activity is approved in advance by the audit committee of the issuer.
Which of the following procedures regarding notes payable would an accountant most likely perform during a nonissuer’s review engagement?
Making inquiries of management regarding maturities, interest rate, and collateral.
A review primarily involves performing analytical procedures on financial data and making inquiries. The accountant also (1) reads the financial statements, (2) reconciles them with the accounting records, and (3) obtains written representations from management.
The strongest criticism of the reliability of audit evidence that the auditor physically observes is that
The auditor may not be qualified to evaluate the items (s)he is observing.
The auditor may not be qualified to evaluate the quality or condition of the items observed, e.g., the quality of diamonds or the quantity of oil reserves. In such cases, the reliability of the evidence obtained is doubtful, and the auditor typically uses the work of an auditor’s specialist. Moreover, observation does not verify the cost or ownership of assets. Ordinarily, observation is best suited to verifying the existence of an asset.
When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should
State that the basis of presentation is a basis of accounting other than GAAP.
An auditor may report on financial statements prepared in accordance with a special purpose framework. Except when regulatory-basis statements are intended for general use, an emphasis-of-matter paragraph (titled “Basis of Accounting”) should follow the opinion paragraph. It (1) identifies the special purpose framework, (2) refers to the note describing the framework, and (3) states that the framework is not GAAP.
When reporting to the audit committee on conditions relating to an entity’s internal control observed during an audit of a nonissuer’s financial statements, the auditor should include a
Restrictions on the use of the report.
The report is a by-product of the engagement. It is intended solely for the information and use of those charged with governance, management, and others within the organization (or specified regulatory agency) and is not intended to be and should not be used by anyone other than these specified parties (AU-C 905). But law or regulation may require the report to be given to governmental authorities. For issuers, the auditor must express an opinion on whether the client maintained, in all material respects, effective internal control over financial reporting. This report is not restricted as to use.
The auditor draws attention to a matter that is not presented or disclosed in the financial statements by including
An other-matter paragraph.
An other-matter paragraph is used in the auditor’s report to draw users’ attention to any matter relevant to users’ understanding of the auditor’s (1) audit, (2) responsibilities, or (3) report. Unlike the matter addressed in an emphasis paragraph, the other matter is not required to be presented or disclosed in the financial statements.
Page, CPA, has T Corp. and W Corp. as audit clients. T Corp. is a significant supplier of raw materials to W Corp. Page also prepares individual tax returns for Time, the owner of T Corp., and West, the owner of W Corp. When preparing West’s return, Page finds information that raises going-concern issues with respect to W Corp. May Page disclose this information to Time?
No, because the information is confidential and may not be disclosed without West’s consent.
A member in public practice cannot disclose confidential client information without the client’s consent. The only exceptions are (1) in response to an enforceable subpoena; (2) a review of the CPA’s professional practice; (3) a discharge of professional obligations; and (4) a response to an inquiry made by the professional ethics division, trial board of the AICPA, or an investigative or disciplinary body of a state society or board of accountancy.
An auditor determines that a client has properly capitalized a leased asset (and corresponding lease liability) as representing, in substance, an installment purchase. As part of the auditor’s procedures, (s)he should
Evaluate the propriety of the interest rate used in discounting the future lease payments.
Under U.S. GAAP, a capital lease is recorded by the lessee as an asset and a liability at the present value of the minimum lease payments. Thus, the interest rate used in the discounting process is an important consideration in determining whether the asset is fairly presented in the balance sheet. The interest rate is the lessee’s incremental borrowing rate, unless the lessor’s implicit rate in the lease is known and is less than the lessee’s incremental rate.
An internal auditor’s work would most likely affect the nature, timing, and extent of an independent auditor’s auditing procedures when the internal auditor’s work relates to assertions about the
Existence of fixed asset additions.
Assertions may relate to material financial statement amounts for which the risks of material misstatement or the degree of subjectivity involved in the evaluation of the audit evidence is high. In these cases, reliance on the internal auditor is less effective. However, certain assertions may relate to less material financial statement amounts for which the risks of material misstatement or the degree of subjectivity involved is low. For example, the auditor may be able to rely on the internal auditor’s work regarding assertions about the existence of cash, prepaid assets, and fixed asset additions.
