AUD 2 Flashcards
Using computers in auditing may affect the methods used to review the work of staff assistants because:
- More supervision would be necessary;
- Documenting the supervisory review may require consulting services personnel
- Supervisory personnel may not have an understanding of the capabilities and limitations of computers
- Audit documentation may not have readily observable details of calculation
Choice “4” is correct. When using computers in an auditing task, audit documentation may not contain readily observable details of calculations (e.g., present value calculations). In order to review assistants’ work, a supervisor may have to examine the formulas used on the computer rather than simply examining the audit documentation.
Choice “1” is incorrect. Use of a computer may result in a decrease, rather than increase, in supervisory time because it is quicker to review the accuracy of such things as footings, ratio calculations, and cross references.
Choice “2” is incorrect. Consulting service personnel should not be necessary to document the supervisory review.
Choice “3” is incorrect. The familiarity of supervisory personnel with the capabilities and limitations of computers would not have an effect on the review process.
Which of the following tasks can be achieved using generalized audit software?
- Determining acceptable risk levels for substantive testing of account balances
- Filtering data on accounts receivable data recording
- Detecting transactions that may be suspicious due to alteration in input
- Assessing likelihood of fraud based on input of fraud risk factors
Choice “2” is correct. Generalized audit software may select items meeting specified criteria, such as filtering data based on accounts receivable data recording.
Choice “1” is incorrect. Generalized audit software is unable to make subjective decisions, such as determining acceptable risk levels for substantive testing of account balances. The auditor must make this determination.
Choice “3” is incorrect. Generalized audit software is unable to detect transactions that may be suspicious due to alteration of data input.
Choice “4” is incorrect. Generalized audit software allows an auditor to perform tests of controls and substantive tests directly on the client’s system. This software is unlikely to assess the likelihood of fraud. The auditor must make this determination.
Which of the following statements about internal control is correct?
- There is no relationship between an entity’s objective and the components of internal control
- Internal control is relevant to the entire entity, or to any of its operating units or business functions
- all of the entity’s objectives and related internal controls are relevant to an audit of the entity’s financial statements
- An understanding of internal control relevant to each of the entity’s operating units and business functions is necessary
Choice “2” is correct. Internal control is relevant to the entire entity, or to any of its operating units or business functions.
Choice “1” is incorrect. There is a direct relationship between:
An entity’s objectives, which are what the entity strives to achieve, and
The components of internal control, which represent what is needed to achieve the objectives.
Choice “3” is incorrect. Not all of the entity’s objectives and related controls are relevant to an audit of the entity’s financial statements.
Choice “4” is incorrect. Although internal control is relevant to each of the entity’s operating units and business functions, an understanding of internal control relevant to each operating unit and business function may not be necessary to plan and perform an efficient audit.
Which of the following statements indicate that the auditor has gained a sufficient understanding of a client’s internal control related to the sales order process?
- In a statistically valid sample of 100 sales transactions, the auditor found five undiscovered exceptions and concluded that the system was weak
- The auditor noted in a narrative that the documentation of the sales order system showed the printing of shipment-exception report listing non-invoiced shipments
- The auditor interviewed the company’s supervisor of sales clerk and reviewed shipment-exception reports that were randomly selected and that showed significant unrecorded balances
- The auditor compared sales orders processed with processing clerk head count for three years and noted that processed orders significantly declined while the clerk headcount remained the same
Choice “2” is correct. This statement shows that the auditor has gained a sufficient understanding of a client’s internal controls related to the sales order process. A narrative is one way an auditor can describe his or her understanding of internal control.
Choice “1” is incorrect. This statement relates to the actual testing of the control rather than obtaining an understanding of the control because the auditor performed a “statistically valid sample” and concluded on the sample.
Choice “3” is incorrect. This statement is referring to substantive testing (aka dollar balance testing) because the auditor noticed significant unrecorded balances.
Choice “4” is incorrect. This statement does not provide information about internal controls related to the sales order process. The statement provides information about efficiency of the sales order process because it evaluates how many orders were processed as compared with clerk head count.
Which of the following is not true about the report release date?
- It is often the date on which the report is delivered to the client
- it is defined as the date after which existing documentation must not be deleted and the additions to the documentation file must be documented as such
- It is the date at which the auditor grants the client permission to use the report
- It is sued to define the beginning of the retention period
Choice “2” is correct. The documentation completion date (and not the report release date) is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
Choice “1” is incorrect. The report release date is often the date on which the report is delivered to the client.
Choice “3” is incorrect. The report release date is the date on which the auditor grants the client permission to use the report.
Choice “4” is incorrect. The report release date is used to define the beginning of the retention period.
An auditor obtains knowledge of the client’s communication and information system in order to understand each of the following expect:
- How transactions are initiated, processed and reported
- The process used to prepare the financial statements
- The means used by an entity to communicate the financial reporting roles to its staff
- The means used by an entity to ensure management’s directives are carried out
Choice “4” is correct. Control activities (not the information and communication system) are the policies and procedures that help ensure that management directives are carried out.
Choices “1”, “2”, and “3” are incorrect. The auditor obtains an understanding of an entity’s information and communication system to understand how transactions are initiated, processed, and reported, the financial reporting process, and the means used by an entity to communicate financial reporting roles and responsibilities.
An auditor is considering internal control in an automated environment. Under these circumstances, the auditor would need to focus on automated controls for all of the following reasons except:
- Even manual controls may be dependent to some extent on the effective functioning of automated controls
- Much of the information used in monitoring the internal control system may be provided through the use of information technology
- It is more efficient and cost-effective to focus on automated controls rather than manual controls
- Unauthorized data access, systems or programs creates an additional control risk
Choice “3” is correct. It is not necessarily more efficient or cost-effective to focus on automated controls rather than manual controls. Evaluation of efficiency and effectiveness must be performed on a client-by-client basis.
Choice “1” is incorrect. The effectiveness of manual user controls may depend on the accuracy of information provided to the user by IT systems.
Choice “2” is incorrect. Much of the information used in monitoring the internal control system is provided by IT, and therefore the accuracy of the IT system is crucial.
Choice “4” is incorrect. One of the greatest risks that arises with the increased use of IT is unauthorized access to data, systems, and programs.
An auditor ordinarily uses a trial balance resembling the financial statement without footnotes, but containing:
- Reclassifications and adjustments
- Reconciliations and tickmarks
- Accruals and deferrals
- Expenses and revenue summaries
Choice “1” is correct. An auditor’s working trial balance generally contains columns for reclassifications and adjustments.
Choice “2” is incorrect. Reconciliations and tickmarks are included within audit documentation, but would not necessarily be shown in columns on the working trial balance.
Choice “3” is incorrect. Accruals and deferrals are included within audit documentation, but would not necessarily be shown in columns on the working trial balance.
Choice “4” is incorrect. Expense and revenue summaries are included within audit documentation, but would not necessarily be shown in columns on the working trial balance.
Which of the following statements about internal controls is correct?
- Properly maintained internal controls reasonably ensures that collusion among employees cannot occur
- The establishment and maintenance of internal control is the responsibility of internal audit
- Exceptionally strong internal control is enough for the auditor to eliminate substantive testing on significant accounting balances
- The cost-benefit is a primary criterion that should be considered in designing internal control
Choice “4” is correct. The concept of reasonable assurance recognizes that the cost of an entity’s internal control should not exceed the benefits that are expected to be derived. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
Choice “1” is incorrect. Even a properly maintained system of internal control is unable to reasonably ensure that collusion among employees cannot occur.
Choice “2” is incorrect. Establishing and maintaining internal control is the responsibility of management – not the internal auditor.
Choice “3” is incorrect. An exceptionally strong internal control that has been tested and can be relied upon by the auditor will allow the auditor to reduce (but not eliminate) substantive tests on significant account balances.
An auditor would least likely use computer software to:
- Access client data files
- Construct parallel simulations
- prepare spreadsheets
4, Assess EDP control risk
Choice “4” is correct. The assessment of control risk is based on auditor judgment. A computer cannot replace professional auditor judgment in assessing control risk.
Choice “1” is incorrect. The auditor would use generalized audit software or retrieval package software to access client data files.
Choice “2” is incorrect. Computer software would be used when constructing parallel simulations. Parallel simulation involves taking the client’s data and reprocessing it using the auditor’s equipment and software.
Choice “3” is incorrect. The auditor would most likely use some sort of software to prepare spreadsheets.
In planning an audit, the auditor obtains sufficient understanding of the existing internal control. Which of the following is not among the auditor’s primary objectives for obtaining such knowledge?
- Consider the factors that affect the risk of material misstatement
- Identify types of material misstatement
- Make constructive suggestions to the client for improvement
- Design effective substantive testing
Choice “3” is correct. Making constructive suggestions to the client is not a primary objective for obtaining an understanding of internal control, although it may be a desirable by-product of an audit engagement.
Choices “2”, “1”, and “4” are incorrect, as the following are primary internal control planning objectives of an auditor in a financial statement audit:
2.
Identify types of potential material misstatements.
1.
Consider factors that affect the risk of material misstatements.
4.
Design effective substantive tests.
Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?
- Gross margin information regarding the client’s industry
- Confirmation of receivables verifying account balances
- Client records documenting the use of EDP programs
- Anticipated results documented in budgets and forecasts
Choice “3” is correct. Client records documenting the use of EDP programs would be a relevant item for an auditor to examine while determining if internal control is operating as designed.
Choice “1” is incorrect. Industry gross margin information is evidence an auditor would examine while performing analytical procedures. Analytical procedures may be used as substantive tests, because they deal with dollar amounts rather than controls.
Choice “2” is incorrect. Confirmation of receivables is evidence an auditor would examine while performing substantive tests, because they deal with dollar amounts rather than controls.
Choice “4” is incorrect. Budgets and forecasts are evidence an auditor would examine while performing analytical procedures (comparison of expected results to actual). Analytical procedures may be used as substantive tests, because they deal with dollar amounts rather than controls.
