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Audit - New > A2 - Quality Control, Engagement Acceptance, Planning, and Internal Control > Flashcards

A2 - Quality Control, Engagement Acceptance, Planning, and Internal Control Flashcards

1
Q

(T/F) The primary purpose of a second partner review (wrap-up review) is to evaluate the significant judgments made by the engagement team and the related conclusions reached in forming the overall conclusion

A

T

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2
Q

(T/F) The purpose of establishing quality-control policies and procedures for deciding whether to accept or continue a client relationship is to minimize the likelihood of associating with clients whose management lacks integrity

A

T

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3
Q

Quality-control elements (HELP ME)?

A
  1. Human resources
  2. Engagement/client acceptance and continuance
  3. Leadership responsibilities
  4. Performance of the engagement
  5. Monitoring
  6. Ethical requirements
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4
Q

(T/F) A CPA firm is not required to adopt a system of quality control.

A

F

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5
Q

(T/F) Quality control standards relate to the conduct of a firm’s entire practice, whereas professional standards such as GAAS relate to the conduct of an individual engagement

A

T

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6
Q

(T/F) The adoption of quality control standards increases the likelihood of compliance with professional standards on individual engagements

A

T

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7
Q

(T/F) A firm that has not adopted an appropriate system of quality control may still be in compliance with professional standards with respect to individual engagements

A

T

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8
Q

(T/F) A firm’s failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements

A

F

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9
Q

(T/F) The nature and extent of a CPA firm’s quality controls depend on a number of factors, such as its size, the degree of the operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations

A

T

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10
Q

Considerations for assigning personnel to an engagement:

A
  1. engagement size and complexity
  2. personnel availability
  3. special expertise required
  4. timing of the work to be performed
  5. continuity and periodic rotation of personnel
  6. opportunities for on-the-job training
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11
Q

Audit documentation serves mainly to provide:

A
  1. the principal support for the auditor’s report
  2. assistance planning, conduct, and supervision of the audit
  3. accountability
  4. useful information
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12
Q

Under the provisions of the Sarbanes-Oxley Act of 2002, registered public accounting firms are required to prepare and maintain audit workpapers and other information related to any audit report for a period of ________ years.

A

Seven years

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13
Q

The deadline for the completion of audit documentation of a nonissuer is within __ days after the report release date.

A

Statements on Auditing Standards (SAS) requires documentation to be filed within 60 days following the report release date

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14
Q

The deadline for the completion of audit documentation of an issuer is within __ days after the report release date.

A

PCAOB requires documentation to be filed within 45 days following the report release date and requires preparation of an “engagement completion document” identifying all significant findings and issues.

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15
Q

(T/F) Audit documentation should be prepared in enough detail so that a reader of the FS who has no previous connection with the audit can understand the procedures performed and the evidence obtained.

A

F

Audit documentation should be prepared in enough detail so an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.

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16
Q

For audits of nonissuers, audit documentation should be retained for at least ___ years

A

five years

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17
Q

For audits of issuers, audit documentation should be retained for at least ___ years

A

seven years

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18
Q

(T/F) The auditor should document findings that could result in a modification of the auditor’s result.

A

T

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19
Q

(T/F) If the result of audit procedures indicate a need to revise the previous assessment of risk, the new assessment should be documented and the original assessment should be removed

A

F

Both assessments should be documented and the auditor should address responses to the new risk

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20
Q

(T/F) If an oral explanation serves as sufficient support for the work the auditor performed, the explanation should be documented in the working papers

A

F

On their own, oral explanations do not represent adequate support for the work the auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation.

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21
Q

An auditor ordinarily uses a working trial balance resembling the FS without footnotes, but containing columns for:

A

reclassifications and adjustments

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22
Q

What summarizes the timing and details of the auditor’s planned field work?

A

an engagement letter

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23
Q

Report release date?

A

(it is often the date on which the report is delivered to the client) date on which the auditor grants the client permission to use the report. It is also used to define the beginning of the retention period (5 years or 7 years) and the completion period (60 days or 45 days)

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24
Q

Documentation completion date?

A

is defined as the date after which existing documentation must not be deleted before the end of the retention period, and additions to the documentation file must be documented as such (60 days or 45 days after report release date)

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25
Q

(T/F) Audit documentation for a specific audit should demonstrate compliance with quality control standards

A

F Quality control standards relate to the conduct of a firm’s audit practice as a whole, and compliance with such standards would not be demonstrated by audit documentation for one specific audit engagement

  • It should demonstrate compliance with the standards of field work
  • It should be sufficient to enable an experienced auditor who has no previous connection with the audit can understand the nature, timing, extent, and results of auditing procedures performed
  • It should indicate which members of the audit team performed and reviewed the audit work
26
Q

(T/F) Significant audit findings do not include staffing changes

A

T

Staffing changes should still be included in audit documentation even though it is not a significant audit finding

27
Q

Factors affecting the nature and extend of audit documentation include:

A
  1. Risk of material misstatement
  2. Extent to which judgment was required in performing the work and evaluating the results
  3. The nature of the specific auditing procedure
  4. The significance of the evidence obtained
  5. The nature and extent of any problems identified
  6. The need to document conclusions that may not be obvious
28
Q

Permanent file? (audit documentation)

A

includes audit documentation that has a continuous interest from year to year (CF)

contracts, pension plans, lease, stock options, bylaws, articles of incorporation, minutes of meetings, bond indentures, and internal information

29
Q

Current file? (audit documentation)

A

includes all audit documentation applicable to the year under audit

audit plan, FS and auditor’s report, working trial balance, letter of confirmation and representation, significant audit findings, TOC, substantive tests, etc.

30
Q

(T/F) In an initial audit it is mandatory to make inquiries of the predecessor auditor, but client permission is needed.

A

T

If client does not approve, then the auditor should consider whether the should go forward and accept the engagement.

31
Q

(T/F) A successor auditor should request the new client to authorize the predecessor auditor to allow a review of both the PY engagement letter and the working papers.

A

F

Should not be allowed access to the engagement letter as that has no impact on the CY audit

32
Q

An engagement letter:

A

should be signed and dated by the client, reduces the risk of misunderstanding, generally includes the objectives of the engagement, usually includes limitations of the engagement (such as the fact that the auditor will obtain only reasonable assurance and therefore a material misstatement may remain undetected), but it does not generally include specific audit procedures

33
Q

(T/F) As long as the CPA concludes that there is a reasonable justification for the change in engagement from audit to a review, there are no additional requirements due to the change.

A

T

34
Q

(T/F) If the accountant concludes that there is reasonable justification to change the engagement, the accountant’s review report should not include reference to the original engagement, to any auditing procedures that may have been performed, or to the scope limitation that resulted in the changed engagement.

A

T

35
Q

Factors that indicate less complex operations include:

A
  1. fewer business lines
  2. less complex business processes and financial reporting systems
  3. more centralized accounting
  4. extensive involvement of senior management in day-to-day operations
  5. few levels of management
36
Q

What is the most likely procedure an auditor would include in the initial planning of a FS audit?
A. Written representation from the client’s management
B. Examine documents to detect any noncompliance with laws
C. Determine the extent of involvement of the client’s internal auditors
D. Considering whether estimates are reasonable

A

C (CORRECT ANSWER) Initial planning:

  • involvement of other auditors, specialists, and the client’s internal auditors
  • assignment of staff to specific audit areas
  • timing of testing and audit team meetings
  • budget hours to assign to specific audit areas
  • extent, location , and timing of reviews
37
Q

FS assertions? (COVER U)

A
  1. Completeness
  2. CutOff
  3. Valuation, Allocation, and Accuracy
  4. Existence and Occurrence
  5. Rights and Obligations
  6. Understandability and Classification
38
Q

(T/F) Applying substantive tests to the details of asset and liability accounts as of an interim date increases risk, as it is possible that errors will occur between the date of interim testing and the BS date. For this reason, the auditor generally selects for interim examination only accounts that are reasonably predicable with respect to amount, relative significance, and composition, and must also identify procedures sufficient to extend interim conclusions to year-end.

A

T

39
Q

(T/F) Before performing substantive tests at an interim date, the auditor must assess the difficulty in controlling the incremental audit risk from the interim date (on which an opinion is rendered)

A

T

40
Q

In assessing the OBJECTIVITY of internal auditors, an independent auditor should:

A

Should determine the ORGANIZATIONAL level to which the internal auditors report, as well as by policies prohibiting audits of areas where the internal auditor lacks independence. Should also consider the Internal auditing standards developed by the Institute of Internal Auditors

41
Q

An auditor who uses the work of a specialist may refer to the specialist in the auditor’s report if the:

A

Auditor modifies the report because of the different between the client’s and the specialist’s valuations of an asset

42
Q

In assessing the COMPETENCE of internal auditors, an independent auditor should:

A

Should examine the quality of audit documentation, the audit plan and audit procedures, and the educational level and professional experience

43
Q

(T/F) Internal auditors are part of the system of internal control. Their audits would cover more areas in greater depth than those of the independent auditors, whose concerns are limited to areas materially affecting the FS taken as a whole. For example: internal auditors would be more involved in analyzing and reporting on the actual operations of the entity of which they are a part

A

T

44
Q

specialist?

A

a person or firm with special skills in a field other than accounting or auditing

45
Q

(T/F) If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should raise or lower the materiality level as appropriate to the situation

A

T

46
Q

Materiality?

A

information that is likely to be viewed by a reasonable investor as altering the mix of available information

47
Q

Risk assessment procedures include obtaining an understanding of:

A
  • industry, regulatory, and other external factors
  • the applicable financial, and other external factors
  • technological factors
  • the nature of the entity
  • the selection and application of accounting policies
  • the entity’s objectives, strategies, and business risks
  • the entity’s financial performance
  • the group, its components, and their environments, if applicable
48
Q

Risk assessment procedures include obtaining an understanding of:

A
  • industry, regulatory, and other external factors
  • the applicable financial, and other external factors
  • technological factors
  • the nature of the entity
  • the selection and application of accounting policies
  • the entity’s objectives, strategies, and business risks
  • the entity’s financial performance
  • the group, its components, and their environments, if applicable

Others:

  • inquiries of management and others within the organization
  • analytical procedures that study plausible relationships between financial and nonfinancial data of an entity
  • audit data analytics
49
Q

Purpose of internal controls:

A

to help a company meet its objectives (reliable financing reporting, effective/efficient operations, and compliance with laws/regulations)

50
Q

Components of internal controls (CRIME):

A
  1. Control environment
  2. Risk assessment (this is management’s assessment, not the auditor’s)
  3. Information and communication systems
  4. Monitoring
  5. Existing control activities
51
Q

(T/F) Inherent limitations of internal controls include management override of controls, human error, and collusion

A

T

52
Q

(T/F) The use of information technology may affect any of the five components of internal controls

A

T

53
Q

Benefits and risks are associated with the use of information technology:

A

benefits: faster processing, improved consistency
risks: unauthorized access to data or programs

54
Q

(T/F) An entity’s use of information technology affects the auditor’s objectives

A

F

It affects both the evaluation of internal control and the procedures used to gather evidence

55
Q

IT environment may consist of different layers such as:

A
  • hardware, software, network, operating systems, and data storage
56
Q

Manual vs computerized IT environments

A

computerized - uniform processing improves consistency, reduces paper audit trails, and increases the risk of unauthorized access)

57
Q

Computer assisted audit techniques or CAATs that may be used:

A
  1. transaction tagging: electronically marks specific transactions
  2. embedded audit modules: sections of program code collect data for the auditor
  3. Test data - use of the client’s system to process the auditor’s data, offline
  4. Integrated test facility - use of the client’s system to process the auditor’s data, online (test data commingled with live data)
  5. Parallel simulation (reperformance test) - use of the auditor’s system to reprocess client data and then compare results with the client’s files
58
Q

Generalized audit software packages (GASP)?

A

Allow the auditor to perform tests of controls and substantive tests directly on the client’s system

59
Q

Tasks typically performed by GASPs include:

A
  • examining transactions for control compliance
  • selecting items meeting specified criteria
  • recalculating amounts and totals
  • reconciling data from two separate files
  • performing statistical analysis on transactions
60
Q

Advantages of using GASPs:

A
  • allow the auditor to sample and test a much higher percentage of transactions, which should result in a more reliable audit
  • require little technical knowledge
  • can significantly reduce audit time without sacrificing quality

Audit - New (5 decks)

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