AUD Becker 3 Flashcards
What factor most likely would assist an independent auditor is assessing the objectivity of the internal auditor?
The organizational status of the director of internal audit.
When assessing internal auditors’ objectivity, an independent auditor should
Consider the policies the prohibit the internal auditors from auditing areas where they were recently assigned.
What is NOT a required part of the understanding between the client and the auditor?
Mgmt’s responsibility to correct deficiencies in internal control identified by the auditor.
Which of the following factors would a CPA ordinarily consider in the planning stage?
I. Financial statement accounts likely to contain a misstatement?
II. Conditions that require extension of audit tests?
I. Financial statement accounts likely to contain a misstatement? YES
II. Conditions that require extension of audit tests? NO
In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditors report if, as a result of the specialists findings, the auditor
Becomes aware of conditions causing substantial doubt about the entity’s ability to continue as a going concern.
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods
Influence the design of internal control
When assessing an internal auditor’s competence, a CPA ordinarily obtains information about all of the following EXCEPT
Access to information about related parties
Samples to test internal control are intended to provide a basis for the auditor to conclude whether
The controls are operating effectively.
When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase
Extent test of details
The acceptable level of detection risk is inversely related to
Assurance provided by substantive tests
Regardless of the assessed level of control risk, an auditor would perform some
Substantive tests to restrict detection risk for significant transaction classes.
As the acceptable level of detection risk decreases, the assurance directly provided from
Substantive tests should increase
In a financial statement audit, inherent risk is evaluated to help an auditor assess
The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls
What is an important consideration when deciding the nature of tests to use in a financial statement audit?
The procedures to be applied on a particular engagement are a matter of the auditor’s professional judgement.
Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity, and rationalization/attitude)?
The fraud risk factors should be discussed by engagement personnel during planning.
What factor would most likely would heighten an auditors concern about the risk of fraudulent financial reporting?
An overly complex organizational structure involving unusual lines of authority.
Prior to, or in conjunction with, the information gathering procedures for an audit, audit team members should discuss the potential for material misstatements due to fraud. What is the mind set that the audit team should maintain?
Questioning.
What is the primary objective of the fraud brainstorming session
Assess the potential for material misstatement due to fraud.
What statement is true concerning analytical procedures used in planning an audit engagement?
They usually use financial and non financial data aggregated at a high level.
If the assessed level of fraud risk is high
The auditor should attempt to reduce detection risk.
Which of the following procedures would LEAST likely result in the discovery of possible noncompliance with laws and regulations?
Reviewing an internal control questionnaire.
While performing analytical procedures in the planning state, the auditor most likely would develop expectations by reviewing?
Unaudited information from the internal quarterly reports.
When the auditor’s risk assessment is based on the effective operation of controls, the audit will most likely involve
identifying specific internal controls relevant to specific assertions
An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports
the planned level of assurance at the relevant assertion level
Test of controls include such procedures as
Inspecting documentation
Inquiry - alone is not sufficient
Observation
Reperformance
As part of understanding internal control, an auditor is NOT required to
Obtain knowledge about the operating effectiveness of internal control
What would be difficult to determine because electronic evidence may not be retrievable after a specific period of time?
The timing of control and substantive tests.
What is not a financial statement assertion related to account balances?
Valuation and Competence
What is an example of fraudulent financial reporting?
Company management changes inventory count tags and overstates ending inventory, while understanding COGS.
What is meant by the term “fraud risk factors?”
Factors whose presence often has been observed in circumstances where frauds have occurred.
When considering internal control, an auditor should be aware of the concept of reasonable assurance which recognizes that
The cost of an entity’s internal control should not exceed the benefits expected to be derived.
An entity’s ongoing monitoring activities often include
Reviewing the purchasing function
What is a provision of the Foreign Corrupt Practices Act?
Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurance that internal control objectives are met.
What statement is correct concerning the relevance of various types of controls to a financial audit?
Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may be relevant.
What statement regarding auditor documentation of the client’s internal control is correct?
No one particular form of documentation is necessary, and the extent of documentation may vary.
What may not be required on a particular audit of a nonissuer (nonpublic) company?
Test of controls
An auditor may compensate for a weakness in internal control by increasing
Extent of analytical procedures
Regardless of the assessed level of control risk, an auditor would perform some
substantive tests to restrict detection risk for significant transaction classes
What control is least likely to be relevant to a financial statement audit?
Procedures that prevent the excess use of materials in production.
What would NOT be considered an inherent limitation of the potential effectiveness of an entity’s internal control?
Incompatible duties, Lack of segregation of duties, Lack of audit committee
An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. What action would be efficient for obtaining information about the transfer agents internal control?
Review reports on internal control placed in operation and it’s operating effectiveness produced by the agent’s own auditor.
In obtaining an understanding of the entity and it’s environment, including its internal control, an auditor is required to obtain knowledge about the
Design of relevant internal controls pertaining to financial reporting in each of the 5 internal control components.
In planning an audit, the auditor’s knowledge about the design of relevant internal controls should be used to
Identify the types of potential misstatements that could occur.
Which of the following is NOT a possible reason why a properly designed system of internal control may fail to prevent or detect fraud?
Inadequate segregation of duties may allow one person.
An auditor’s risk assessment is based on the assumption that controls are operating effectively. Which of the following was NOT a step in making this assessment?
Perform tests of details of transactions to detect material misstatements in the financial statements.
When an auditor plans to rely on controls that have changed since they were last tested, what course of action would be most appropriate?
Test the operating effectiveness of such controls in the current audit.
An auditor of a manufacturer most likely would question whether a client has committed acts of non compliance with laws and regulations if the client has
Been forced to discontinue operations in a foreign country.
What is NOT a control environment factor?
Proper segregation of duties.
What statement is true regarding the risk assessment component of internal control?
An auditor evaluates an entity’s risk assessment to understand how management addresses risk relevant to financial reporting.
Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should
consider whether the amounts of the year-end balances are selected for interim testing are reasonably predictable.
An auditor should obtain knowledge of a client’s information and communication system in order to understand each of the following, EXCEPT:
The means used by an entity to ensure that management directives are carried out.
An auditor is required to document the auditor’s understanding of?
I. Entity’s control activities that help ensure management directives are carried out?
II. Entity’s control environment factors that help the auditor plan the engagement?
I. Entity’s control activities that help ensure management directives are carried out? YES
II. Entity’s control environment factors that help the auditor plan the engagement? YES
What statement about internal control is correct?
Internal control is relevant to the entire entity or to any of its operating units or business functions.
What is NOT a step in an auditor’s assessment of control risk?
Perform tests of details of transactions to detect material misstatements in the financial statements.
The framework most likely to be used by management in it’s internal control assessment under requirements of SOX 2002 is?
COSO Internal Framework
What is an accurate statement about internal control weakness?
Material weaknesses are also control deficiencies and significant deficiencies.
The minimum likelihood of loss involved in the consideration of a control deficiency is
Not explicitly considered.
For an issuer (public) co. audit of internal control, walkthroughs provide the auditor with primary evidence to:
I. Evaluate the effectiveness of internal control.
II. Confirm whether controls have been implemented.
I. Evaluate the effectiveness of internal control. YES
II. Confirm whether controls have been implemented. YES
For purposes of an audit of internal control performed under PCAOB, an account is significant if there is more than
Remote likelihood that is could contain material misstatements.
How large must the actual loss identified by the auditor be for a control deficiency to possibly be considered a material weakness?
I. Immaterial
II. Material
I. Immaterial - BOTH
II. Material - BOTH
In reporting on an entity’s internal control over financial reporting, a practitioner should include a paragraph that describes the
Inherent limitations of any internal control.
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:
The auditors responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that came to the auditors attention.
Analytical procedures used during risk assessment in an audit should focus on
Providing assurance that potential material misstatements will be identified.
Which of the following is least likely to be considered a risk assessment procedure?
Confirmation of ending accounts receivable.
In an audit of a nonissuer co, the auditors identify rusks. These risks often
Involve judgemental matters.
Information and communication would be the component for the following factors:
- Proper presentation of transactions and related disclosures.
- Measurement and recording of proper monetary values.
- The way in which significant events are captured by accounting system.
Risk assessment would be the component for the following factors:
- Adoption of new accounting principles
- New Personnel
- Incorporation of new technology
- Corporate restructuring.
Monitoring would be the component for the following factors:
- Internal audit function.
Control Environment would be the component for the following factors:
- Participation of those charged with governance.
- Assignment of authority, responsibility, and accountability.
- Human resource policies and practices.
Existing control activities would be the component for the following factors:
- Authorization of transactions
- Segregation of duties.
- Pre-numbering of documents.
- Performance reviews.
Both Management and Auditor responsible for the following tasks to be performed.
- Coordinating client assistance.
2. Establishing the timing of the audit
Auditor responsible for the following tasks to be performed.
- Following GAAS
2. Obtain understanding of internal control
Management responsible for the following tasks to be performed.
- Preparation of Financial Statements
- Following GAAP
- Establish internal control
- Provision of rep letter
- Compliance with laws and regulations
Since DML returned to profitable operation, its healthier financial condition leads to a decrease in the risk of
material misstatement. Decrease or Increase in RMM?
Decrease in RMM
The risk of material misstatement increases when the internal auditor reports to top management rather than to
the audit committee, because it is less likely that the internal auditor will be able to objectively perform his or
her duties. Decrease or Increase in RMM?
Increase in RMM
The risk of material misstatement increases when key management positions (particularly senior accounting
personnel) encounter turnover. Decrease or Increase in RMM?
Increase in RMM
A change to generally accepted accounting principles will increase the risk of material misstatement because
the change in basis requires management to prepare a number of entries that have not been made in the past.
These entries may be made improperly. Also, difficulty in determining beginning accrual basis balances may
increase the risk of misstatement. Decrease or Increase in RMM?
Increase in RMM
The sale of one half of the company’s controlling interest in Lawrence Equipment Leasing is a transaction that
is outside the ordinary course of business, and accordingly, increases the risk of material misstatement Decrease or Increase in RMM?
Increase in RMM
The risk of material misstatement increases when significant related party transactions occur, as the
substance of a transaction may differ somewhat from its form. Decrease or Increase in RMM?
Increase in RMM
The risk of material misstatement increases where there are unusual and difficult accounting issues present.
The barter transaction would be considered to be an unusual transaction. Decrease or Increase in RMM?
Increase in RMM
The risk of material misstatement increases, as it appears that management has taken an aggressive attitude
toward reporting this transaction. In addition, this appears to be an unusual and difficult accounting issue
involving revenue recognition. Decrease or Increase in RMM?
Increase in RMM
Entities may have an incentive to intentionally misstate reported financial condition and operating results in
situations in which a public (or private) placement of securities is planned. Accordingly, an initial public offering
of stock increases the risk of material misstatement. Decrease or Increase in RMM?
Increase in RMM
The entity’s purchasing agent is required to obtain approval from senior management for purchases in excess of $2,000.00
Control risk I Decrease risk
Requiring approval for large purchases is a good control that would reduce control risk.
A good portion of the entity’s fixed asset base consists of capitalized items.
Inherent risk I Increase risk
Assertions involving complex calculations (such as lease calculations) have relatively high inherent risk.
Brown plans to perform extensive tests of details surrounding the payroll function.
Detection risk I Decrease risk
Extensive testing reduces detection risk.
The entity keeps a large quantity of cash on hand.
Inherent risk I Increase risk
Cash is inherently risky as it is easily stolen and not easily identified as to owner.
Brown plans to perform all of its testing related to cash at year end.
Detection risk I Decrease risk
Testing at year-end (as opposed to during an interim period) reduces detection risk.
The entity’s computer applications are not protected by password controls.
Control risk I Increase risk
Failure to appropriately limit access to computer applications increases control risk.
Employees report the hours worked each week without supervisory oversight.
Control risk ! Increase risk
Failure to require supervisory approval of hours worked increases control risk (e.g., the risk that employees may
deliberately overstate hours worked).
Brown will obtain evidence primarily from external sources in testing the entity’s receivables.
Detection risk I Decrease risk
Use of external evidence reduces detection risk.
The entity’s financial statements do not require use of significant estimates.
Inherent risk I Decrease risk
Not having to rely on estimates, which often have a subjective component, reduces inherent risk.
Brown plans to perform only limited tests of details related to the purchasing function.
Detection risk I Increase risk
Performing limited tests of details increases detection risk.
