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

Question 1

The elements of a CPA firm’s quality control are:

Answer 1

• Human resources
• Engagement/client acceptance & continuance
• Leadership responsibilities
• Performance of the engagement
• Monitoring
• Ethical requirements

Question 2

When assigning personnel to an engagement, the firm should consider the following factors:

Answer 2

• Engagement size & complexity
• Personnel availability
• Special expertise required
• Timing of the work to be performed
• Continuity & periodic rotation of personnel
• Opportunities for on-the-job training

Question 3

Maximum number of days in which an auditor should complete the assembly of the final audit file following the report release date:

Answer 3

• Nonissuer: 60 days

- Issuer: 45 days

Question 4

Audit document retention (how long?):

Answer 4

• Nonissuer: 5 years

- Issuer: 7 years

Question 5

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s:

Answer 5

• Working papers

- It is not appropriate for the auditor to request a review of the predecessor’s engagement letter

Question 6

An auditor’s engagement letter should include:

Answer 6

• The objective and scope of the audit
• The responsibilities of the auditor
• The responsibilities of management (FS & IC)
• A statement that because of inherent limitations, material misstatements may not be detected
• Identification of the applicable financial reporting framework
• Expected form and content of any reports
• Arrangements for the timing of the audit
• Management will provide written representations
• Use of specialists
• Fees and billing arrangements

Question 7

When an auditor is requested to change the engagement from an auditor to another report (i.e. compilation), the auditor must consider:

Answer 7

• The effort needed to complete the audit
• Cost of completing the audit
• The reasons for the client’s request

Question 8

If management disregards its responsibility to maintain an adequate internal control environment, an auditor would:

Answer 8

• Decide NOT to accept a new engagement

Question 9

Communications with the predecessor auditor MUST occur:

Answer 9

• BEFORE the successor auditor accepts the engagement, but CAN ALSO occur AFTER accepting the engagement

Question 10

If the predecessor auditor refuses the give the current auditor of a nonissuer access to the documentation:

Answer 10

• The current auditor should review the risk assessment of the opening balances of the FS

Question 11

• Factors in determining the extent of supervision needed for the staff:

Answer 11

• Nature of the company
• Nature of the work assigned
• Risk of material misstatement
• Knowledge, skill & ability of each team member

Question 12

Financial statement assertions include:

Answer 12

• Completeness
• CutOff
• Valuation, allocation & accuracy
• Existence or occurrence
• Rights & obligations
• Understandability of Presentation & Classification

Question 13

• Primary internal control planning objectives:

Answer 13

• Identify types of potential material misstatements
• Consider factors that affect the risk of material misstatements
• Design effective substantive tests

Question 14

When audit procedures are performed before year end, the auditor must assess:

Answer 14

• The incremental risk involved

- Determine whether sufficient alternative procedures exist to extend the interim conclusions to year end

Question 15

• In order to detect material misstatements in the creation of an audit plan, the auditor would use:

Answer 15

• Substantive procedures (i.e. test of details and analytical procedures)

Question 16

In testing a client’s FS assertions at the account, transaction or disclosure level, an auditor would use:

Answer 16

• Substantive procedures and test of controls

Question 17

The audit strategy outlines the:

Answer 17

• Scope of the engagement
• Reporting objectives
• Timing of the audit
• Required communications
• Factors that determine the focus of the audit
• *Includes a preliminary assessment of materiality and tolerable misstatement

Question 18

• The independent external auditor cannot share responsibility with the internal auditor for:

Answer 18

• Audit decisions
• Judgments
• Assessments (i.e. materiality, estimates, inherent & control risk)

-* Can share responsibility for test of controls and substantive tests

Question 19

An independent auditor should consider the following when assessing an internal auditor’s objectivity:

Answer 19

• Info obtained from previous experience
• Discussions with management
• External quality reviews
• Professional internal auditing standards (i.e The Institute of Internal Auditors)

Question 20

Compared to an independent CPAs audit plan, an audit client’s comprehensive internal audit program is:

Answer 20

• More detailed and covers areas that would not normally be covered by the CPA

Question 21

• The internal auditors’ work may affect the nature, timing & extent of the audit, including:

Answer 21

• Procedures performed in obtaining an understanding of IC
• Procedures performed in assessing the risk of material misstatement
• Substantive procedures performed in gathering direct evidence

Question 22

The concept of materiality involves information that:

Answer 22

• Is likely to be viewed by a reasonable investor as altering the mix of available information
• Influences the judgements of a reasonable investor
• Determined using BOTH quantitative and qualitative thresholds
• Influences judgements about any of the financial statements

Question 23

What would an auditor most likely use in determining the auditor’s preliminary judgement about materiality?

Answer 23

• The entity’s financial statements of the prior year

Question 24

What are analytical procedures?

Answer 24

• Evaluations of financial info made by a study of plausible relationships among data, and they include the comparisons between current and prior year financial info
• Often use financial and nonfinancial data aggregated at a high level

Question 25

An understanding of internal control relevant to WHAT is a necessary FS audit?

Answer 25

- An entity's financial reporting objective

Question 26

5 components of internal control:

Answer 26

- Control environment - Risk assessment - Information & communication systems - Monitoring - Existing control activities CRIME

Question 27

Factors of the control environment (tone at the top)

Answer 27

- Communication & enforcement of integrity and ethical values - Participation of those charged with government - Management's philosophy and operating style - Assignment of authority & responsibility over IT operations - Organizational structure - Human resource policies

Question 28

- An auditor's primary consideration regarding an entity's internal control is whether the controls:

Answer 28

- Affect the financial statement assertions

Question 29

What is a walkthrough?

Answer 29

- Following a transaction from its origination until its reflected in the FS - Inspection-> observation -> inspection of relevant documentation -> reperformance of controls

Question 30

Why does an auditor evaluate an entity's risk assessment?

Answer 30

- To understand how management addresses risks relevant tot financial reporting

Question 31

Internal control over safeguarding assets includes:

Answer 31

- Financial reporting | - Operations objectives

Question 32

Internal control over safeguarding assets includes:

Answer 32

- Financial reporting - Use of a lockbox system for collecting cash - Passwords for limiting access to accounts receivable data files - Operations objectives - Controls to prevent the excess use of materials in production

Question 33

In planning an audit, the auditor's knowledge about the design of relevant internal controls should be used to:

Answer 33

- Identify the types of potential misstatement that could occur

Question 34

The three inherent limitations of internal control:

Answer 34

- Management override - Human error - Deliberate circumvention of controls by collusion of two or more people

Question 35

Objectives of an entity include:

Answer 35

- Financial reporting - Operations - Compliance

Question 36

Proper segregation of duties includes assigning different people the responsibilities of:

Answer 36

- Authorizing transactions - Record keeping - Custody of related assets ARC

Question 37

Existing control activities include:

Answer 37

- Prenumbering of documents - Authorization of transactions - Independent checks to maintain asset accountability - Documentation - Timely and appropriate financial performance reviews - Information processing controls - Physical controls for safeguarding assets - Segregation of duties PAID TIPS

Question 38

In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the:

Answer 38

- Design of controls | - Whether they have been implemented