2.4.19 Flashcards
When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the
Quality.
The purpose of the cutoff is to ensure that the asset and related liability are recognized in the correct period. Accordingly, merchandise included in ending inventory but not yet arrived may not be available for inspection. The quality of such merchandise cannot be assured until the inspection has been conducted after the goods are received.
An essential procedural control to ensure the accuracy of the recorded inventory quantities is
Establishing a cutoff for goods received and shipped.
A proper cutoff point for goods received and shipped assures that only goods owned by the client are included in inventory.
When one auditor succeeds another, the auditor should request the
Client to authorize the predecessor auditor to allow a review of the predecessor auditor’s audit documentation.
The Code of Professional Conduct protects the confidentiality of client information. Hence, the auditor should seek the client’s specific consent for the predecessor auditor to respond fully to the auditor’s inquiries. The auditor should communicate with the predecessor to determine whether to accept the engagement (AU-C 210). If the engagement is accepted, the audit may be facilitated by making specific inquiries of the predecessor and by reviewing the predecessor’s audit documentation. The auditor also should request the client to authorize this review.
The safeguarding of inventory most likely includes
Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.
The recorded accountability for inventory should be compared with existing inventory at reasonable intervals by taking a physical count. If inventory is susceptible to loss through fraud or error, the comparison should be made independently. An independent comparison is one made by persons not having responsibility for inventory custody or the authorization or recording of transactions.
An auditor’s response to the assessment of the risks of material misstatement due to fraud takes various forms. A response with an overall effect on the conduct of the audit is to
Consider whether management’s applications of accounting principles indicates a bias.
The responses to the assessment of fraud risks should reflect a critical evaluation of the audit evidence. These responses may take three forms: (1) those having an overall effect on the audit; (2) those involving changes in the nature, timing, and extent of audit procedures performed in response to specific fraud risks; and (3) those that further address management override. One overall effect of a judgment about heightened fraud risk is to assign more experienced personnel or individuals with specialized skills or to increase supervision. A second overall effect is to consider the selection and application of accounting principles, especially those involving subjective measurements and complex transactions, and whether they indicate a collective bias. Another overall effect is to make unpredictable choices of audit procedures.
Audit evidence concerning undocumented monitoring controls ordinarily is best obtained by
Observing the employees as they apply controls.
For some controls, documentation may not be available or relevant. For example, documentation of operation may not exist for (1) some factors in the control environment, such as assignment of authority and responsibility, or (2) some controls, such as computer controls. In such cases, evidence about effectiveness of operation may be obtained through inquiry combined with other procedures, e.g., observation or computer-assisted audit techniques.
Audit documentation that records the procedures used by the auditor to gather evidence should be
Designed to meet the circumstances of the particular engagement.
Audit documentation should be designed to meet the circumstances of a particular engagement. Audit documentation should provide (1) a sufficient and appropriate record of the basis for the auditor’s report and (2) evidence that the audit was planned and performed in accordance with GAAS (AU-C 230).
In obtaining an understanding of a manufacturing entity’s internal control concerning inventory balances, an auditor most likely would
Review the entity’s descriptions of inventory policies and procedures.
The auditor makes inquiries of personnel, observes activities and operations, and reviews an entity’s documentation of controls relevant to the management of inventories to obtain an understanding of internal control.
Which of the following is not a component of internal control?
Control risk.
Control risk is one of the elements in the audit risk model. It is the risk that a material misstatement that could occur in an assertion will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. Thus, control risk is a function of the effectiveness of internal control, not a component.
Which of the following is a true statement about the required documentation in an audit performed in accordance with generally accepted auditing standards?
A documented audit plan describing the necessary procedures to be performed is required.
An audit plan should be developed and documented based on the overall audit strategy. This strategy, the audit plan, significant changes in them, and the reasons for changes are documented. The audit plan records the nature, timing, and extent of risk assessment procedures and further procedures performed at the assertion level to respond to assessed risks. It also records other planned procedures required by GAAS. Thus, the audit plan is a record of the planning of the audit procedures that can be reviewed prior to their performance (AU-C 300 and AS No. 9).
The auditor’s report expressing an opinion on the effectiveness of an entity’s internal control over financial reporting should include all the following except
That the entity’s internal control is consistent with that of the prior year after giving effect to subsequent changes.
Neither the AICPA’s AU-C 940 nor the PCAOB’s AS 2201 requires the opinion on the effectiveness of internal control over financial reporting to contain a statement about consistency. Moreover, lack of consistency is not a basis for modification of the standard report.
AU-C 500 describes five generalizations about the reliability of evidence. The situations given below indicate the relative degrees of assurance provided by two types of evidence obtained in different situations. Which describes an exception to one of the generalizations?
The report of an auditor’s specialist regarding the valuation of a collection of paintings held as an investment provides greater assurance than the auditor’s physical observation of the paintings.
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 another medium; and (5) consists of original documents. Preference for the report of an auditor’s specialist over the auditor’s physical observation of works of art is acceptable because the auditor is not expected to have such expertise. Physical observation provides evidence of the existence of assets but often does not verify their value, ownership, cost, or condition. Consequently, the generalization in favor of the auditor’s direct knowledge is overcome in this case.
JP Industries conducts its business using IT, and the only documentation of transactions is produced through the IT system. The auditor has concluded that it is not possible to obtain sufficient appropriate audit evidence by performing only substantive procedures for a number of financial statement assertions. The auditor’s alternative strategy is to
Perform test of controls.
The entity conducts its business using IT, and the only documentation of transactions is produced through the IT system. Because the auditor cannot obtain sufficient appropriate audit evidence by performing substantive procedures alone, the auditor should perform tests of controls. These procedures are designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level (AU-C 330 and AS 2301).
An auditor is required to confirm accounts receivable if the accounts receivable balances are
Material to the financial statements.
Confirmation of accounts receivable is a generally accepted auditing procedure. The auditor should confirm accounts receivable unless (1) they are immaterial, (2) confirmation would be ineffective, or (3) the RMM based on other procedures is judged to be sufficiently low.
Which of the following statements concerning the parallel simulation approach when testing a computerized accounting system is false?
Transactions are reprocessed only by the client’s computer programs.
Parallel simulation is a test of the controls in a client’s application program. An auditor-developed program, not the client’s program, is used to process actual client data and compare the outputs and exceptions report with those of the client’s application program. If the client’s programmed controls are operating effectively, the two sets of results should be reconcilable.
