9.5 Flashcards
In identifying matters for communication with an entity’s audit committee, an auditor most likely would ask management whether
It consulted with another CPA firm about accounting matters.
Unless all those charged with governance are managers, the auditor should communicate his or her views on significant accounting and auditing matters about which management consulted with other accountants (AU-C 260).
An auditor expresses an unmodified opinion on internal control over financial reporting after an audit integrated with a financial statement audit. As a result, the
Auditor believes that controls are effective.
The auditor’s objective in an audit of internal control over financial reporting is to express an opinion on whether the entity maintained, in all material respects, effective internal control as of the specified date, based on the control criteria.
Which of the following statements is true about an auditor’s communication to those charged with governance?
The auditor is required to inform those charged with governance about misstatements discovered by the auditor and not subsequently corrected by management.
The matters to be communicated to those charged with governance include uncorrected misstatements, other than those not accumulated by the auditor because they are clearly trivial. The auditor communicates uncorrected misstatements and the effect they may have, individually or aggregated, on the opinion. Furthermore, material uncorrected misstatements should be identified individually. Also, the auditor should communicate to those charged with governance the effect of uncorrected misstatements related to prior periods (AU-C 260).
Which of the following matters is an auditor required to communicate to those charged with governance?
Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity’s financial reporting process.
Certain matters should be communicated to those charged with governance (e.g., the audit committee) if all such individuals are not involved in management. These matters include material, corrected misstatements that were brought to the attention of management as a result of audit procedures (AU-C 260).
Under the AICPA’s auditing standards, which of the following statements about an auditor’s communication of significant control deficiencies is true?
An auditor’s report on significant control deficiencies should include a restriction on the use of the report.
A communication of significant control deficiencies should (1) state that the purpose of the audit was to report on the financial statements, not to provide assurance on internal control; (2) give the definition of significant control deficiencies and material weaknesses; and (3) state that the report 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 the specified parties.
Which of the following best describes a CPA’s responsibility to report on an issuer’s (public company’s) internal control over financial reporting?
To examine the effectiveness of its internal control.
The auditor’s objective is to express an opinion on whether internal control is effective, in all material respects, based on the control criteria.
Which of the following issues related to internal control over financial reporting are required to be communicated in writing to management and those charged with governance?
I. Deficiencies in internal control
II. Significant deficiencies
III. Material weaknesses
II & III only.
Only those control deficiencies considered to be significant deficiencies or material weaknesses are required to be communicated in writing to management and those charged with governance. (But certain deficiencies should not be reported directly to management.) Other control deficiencies that merit management’s attention should be reported to management orally or in writing. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of their assigned functions, to prevent misstatements or detect and correct them on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness but merits attention by those charged with governance. A material weakness is a deficiency, or combination of deficiencies, in internal control that results in a reasonable possibility that a material misstatement of the financial statements will not be prevented, or detected and corrected, on a timely basis. A reasonable possibility means that the probability of the event is more than remote.
In an audit engagement, should an auditor communicate the following matters to those charged with governance?
Auditor’s judgements about the quality of the client’s accounting principles:
Issues discussed with management prior to auditor’s retention:
Yes
Yes
The matters to be discussed with those charged with governance include the quality of the accounting principles used by management. Management is normally a participant in the discussion. Matters covered may include the auditor’s views on the entity’s significant accounting practices, e.g., policies, estimates, and disclosures. Furthermore, in any audit engagement, the auditor and those charged with governance should discuss any major issues discussed with management in connection with the initial or recurring retention of the auditors, for example, issues concerning the application of accounting principles and auditing standards.
Which of the following circumstances would be inappropriate for the auditor to communicate to those charged with governance?
No significant deficiencies in internal control exist that would affect the financial statements.
An auditor may issue a written communication stating that no material weaknesses were identified if the auditor complies with the applicable requirements for such communications. But a written communication stating that no significant deficiencies were identified is prohibited. It might be misunderstood or misused (AU-C 265).
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.
Cain Company’s management engaged Bell, CPA, to audit the effectiveness of Cain’s internal control over financial reporting. Bell’s report, which was accompanied by management’s separate report presenting its written assessment about the effectiveness of internal control, described several material weaknesses and potential errors and fraudulent activities that could occur. Subsequently, management included Bell’s report in its annual report to the board of directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should
Disclaim an opinion as to management’s cost-benefit statement.
If the assessment accompanying the auditor’s report includes a statement that the cost of corrective action exceeds the benefits of implementing new controls, the auditor should include language that disclaims an opinion on the cost-benefit statements as the last paragraph of the report. Also, given material weaknesses, the auditor should express an adverse opinion on the effectiveness of internal control.
An auditor’s communication with the board of directors most likely should
Indicate that it is for the sole use of the board.
Communication may be either oral or in writing and should be documented. The auditor communicates significant findings from the audit in writing when (s)he judges that oral communication is inadequate. A written communication should indicate that it is for the sole use of those charged with governance.
When communicating significant deficiencies in internal control noted in a financial statement audit of a nonissuer, the communication should indicate that
The purpose of the audit was to report on the financial statements, not to provide assurance on internal control.
According to an illustrative written communication in AU-C 265, the auditors state, “we considered the Company’s internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Company’s internal control.”
A client uses a service organization to process its payroll. Which of the following statements is correct regarding the user auditor’s use of the service auditor’s report on internal controls placed in operation?
The client’s auditor can use the service auditor’s report as audit evidence for the client’s internal controls.
If the user auditor is unable to obtain a sufficient understanding of the controls from the user entity, the user auditor may use a service auditor’s report to obtain the understanding and determine whether the controls have been placed in operation.
AU-C 402, Audit Considerations Relating to an Entity Using a Service Organization, applies to a financial statement audit of an entity that uses services of another organization as part of its information system. For this purpose, the user auditor may need to obtain a service auditor’s report. Which of the following is a true statement about a service auditor’s report?
It should include an opinion.
A service auditor’s report should be helpful in providing a sufficient understanding to plan the audit of the user organization. The service auditor’s report may express an opinion on the fairness of the description of the controls implemented at the service organization and whether they were suitably designed. If the service auditor also has tested controls, the report may express an opinion on the operating effectiveness of the controls.
