AUD 5 Flashcards
PCAOB’s auditing standards specifically identify each of the following terms as a category of “specialist” potentially relevant to an audit engagement, except for
auditor-engaged specialist.
company’s specialist.
auditor’s specialist.
auditor-employed specialist.
auditor’s specialist.
Correct! PCAOB auditing standards related to using the work of specialists identify these three categories of specialists: company’s specialist, auditor-employed specialist, and auditor-engaged specialist. The term “auditor’s specialist” is identified by applicable AICPA Statements on Auditing Standards, not by PCAOB auditing standards.
Which of the following applications of sampling to test controls is most appropriate?
Testing a sample of customer orders for evidence of credit approval
Testing a sample of controls to determine segregation of duties between inventory control and sales processing duties
Testing a sample of accounts receivable confirmations
Testing a sample of the budget center directors’ allocation of annual budget to sales units
Testing a sample of customer orders for evidence of credit approval
Correct! Credit approval is a form of authorization that is considered an internal control. Inspecting a sample of customer orders for proper authorization provides evidence about the effectiveness of the control. The auditor is selecting a sample of transactions and verifying that the control procedure of interest (i.e., credit approval) was performed on the transactions.
In meeting the control objective of safeguarding of assets, which department should be responsible for
Distribution of paychecks Custody of unclaimed paychecks
Treasurer Treasurer
Payroll Treasurer
Payroll Payroll
Treasurer Payroll
T T
This answer is correct because these custody functions should not be performed by the payroll department which is a recordkeeping function. Under proper internal control recordkeeping, custody, and authorization of transactions should be segregated.
In estimation sampling for attributes, which one of the following must be known in order to appraise the results of the auditor’s sample?
Estimated dollar value of the population.
Standard deviation of the values in the population.
Actual occurrence rate of the attribute in the population.
Sample size.
Sample size.
This answer is correct because the sample size is needed in order to evaluate the results of the attribute sampling since it is used to calculate the deviation rate for the sample.
Which of the following is true?
Clients have the right to veto any outsourcing by a CPA firm.
Clients must be informed in writing before any professional services are outsourced.
If the client objects to outsourcing of professional services, then the member should either not outsource the work or decline to provide the service altogether.
All three choices provided.
If the client objects to outsourcing of professional services, then the member should either not outsource the work or decline to provide the service altogether.
The outsourcing of professional services requires notification and client approval.
Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor will most likely
Place limited reliance on the work performed by the internal auditors.
Decrease the extent of the tests of controls needed to support the assessed level of detection risk.
Increase the extent of the procedures needed to reduce control risk to an acceptable level.
Avoid using the work performed by the internal auditors.
Place limited reliance on the work performed by the internal auditors.
The independent auditor will place only limited reliance on the work performed by the internal auditors because of their lack of independence. While internal auditors can never be fully independent, a greater level of relative independence is obtained when they report to the board of directors or the audit committee.
Member Cinda is an auditor. She is married to Terry. One of her clients is Bowen Corporation. Which of the following relationships would not impair Cinda’s independence?
Terry owns stock in Bowen.
Terry is an internal auditor at Bowen.
Terry is a custodian at Bowen.
Terry is general counsel at Bowen.
Terry is a custodian at Bowen.
Which of the following is a provision of the Foreign Corrupt Practices Act?
It is a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business.
The auditor’s detection of illegal acts committed by officials of the auditor’s publicly held client in conjunction with foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission.
If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not susceptible to reasonable estimation, the auditor’s report should be modified.
Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met.
Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met.
The Foreign Corrupt Practices Act makes payment of bribes to foreign officials illegal and requires publicly held companies to maintain systems of internal control sufficient to provide reasonable assurances that internal control objectives are met.
Which of the following procedures would be generally performed when evaluating the accounts receivable balance in an engagement to review financial statements in accordance with Statements on Standards for Accounting and Review Services?
Perform a reasonableness test of the balance by computing days’ sales in receivables.
Vouch a sample of subsequent cash receipts from customers.
Confirm individually significant receivable balances with customers.
Review subsequent bank statements for evidence of cash deposits.
Perform a reasonableness test of the balance by computing days’ sales in receivables.
Correct! The basis for conclusions in a review engagement consists primarily of inquiries and analytical procedures. An analytical procedure such as this might be performed.
In an integrated audit of a nonissuer, which of the following is the responsibility of an auditor with regard to testing controls at a company with multiple business units?
Testing controls over only certain specific risks at all business units of the company.
Testing controls over all risks at all business units of the company.
Testing controls over all risks at business units that are material to the company’s consolidated financial statements.
Testing controls over specific risks at business units that are material to the company’s consolidated financial statements.
Testing controls over specific risks at business units that are material to the company’s consolidated financial statements.
CORRECT! AICPA Professional Standards (specifically, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements) states, “In assessing and responding to risk, the group engagement team should test … controls over specific risks that present a reasonable possibility of material misstatement to the group financial statements” (AU-C 940.82). Accordingly, the auditor should test controls over specific risks that have a reasonable possibility of material misstatement to the financial statements.
An entity’s ongoing monitoring activities often include
Periodic audits by the audit committee.
Reviewing the purchasing function.
The audit of the annual financial statements.
Control risk assessment in conjunction with quarterly reviews.
Reviewing the purchasing function.
Ongoing monitoring involves assessing the design and operation of controls on a timely basis and taking necessary corrective actions and such an approach may be followed in reviewing the purchasing function.
Which statement is correct concerning the deletion of audit documentation?
Superseded audit documentation should always be deleted from the audit file.
After the audit file has been completed, the auditor should not delete or discard audit documentation.
Auditors should use professional skepticism in determining which audit documentation should be deleted.
Audit documentation should never be deleted from the audit file.
After the audit file has been completed, the auditor should not delete or discard audit documentation.
After the audit file has been completed (ordinarily 60 days or less after the issuance of the audit report), no portions of audit documentation should be deleted.
A CPA’s report on agreed-upon procedures related to an entity’s compliance with specified requirements should contain
A statement of limitations on the use of the report.
An opinion about whether management’s assertion is fairly stated.
Negative assurance that control risk has not been assessed.
An acknowledgment of responsibility for the sufficiency of the procedures.
A statement of limitations on the use of the report.
Such an agreed-upon procedures report includes a statement of limitations on the use of the report because it is intended solely for the use of specified parties. See AT 601 for information that should be included in such an agreed-upon procedures report.
Which of the following analyses appearing in a predecessor’s working papers is the successor auditor least likely to be interested in reviewing?
Analysis of noncurrent balance sheet accounts.
Analysis of current balance sheet accounts.
Analysis of contingencies.
Analysis of income statement accounts.
Analysis of income statement accounts.
This answer is correct because the successor will normally review working papers of continuing accounting significance. Prior income statement accounts are less likely to have continuing significance than are balance sheet accounts and contingencies.
A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?
The auditor and the client’s management.
The client’s audit committee and the lawyer.
The client’s management and the lawyer.
The lawyer and the auditor.
The auditor and the client’s management.
The client and the auditor should reach an understanding about materiality. This understanding is then communicated to the attorney who will limit his/her response accordingly.
