AUD Becker A2 - Quality Control, Engagement Acceptance, Planning, and Internal Control Part 1 Flashcards
At a minimum, an understanding with a client should include:
A. The assessed level of the risk of material misstatement.
B. The specific audit procedures the auditor plans to perform.
C. The auditor’s opinion regarding whether the financial statements are free of material
misstatement.
D. The objectives and limitations of the engagement, as well as the responsibilities of
management and of the auditor.
Choice “4” is correct. At a minimum, an understanding with a client should include the objectives and limitations of the engagement, as well as the responsibilities of management and of the auditor.
Choice “1” is incorrect. The auditor’s risk assessment procedures are not performed until after an understanding with the client has been established.
Choice “2” is incorrect. The understanding typically does not include specific audit procedures.
Choice “3” is incorrect. The auditor does not issue an opinion until the audit is complete.
Which of the following controls is least likely to be relevant to a financial statement audit?
A. Generation of production statistics used to evaluate variances.
B. Use of computer passwords to limit access to data files.
C. Procedures that prevent the excess use of materials in production.
D. Policies that relate to compliance with income tax regulations.
Choice “3” is correct. Procedures to reduce inefficiency on the production line relate to operational objectives, and not necessarily to financial reporting objectives.
Choices “4”, “2”, and “1” are incorrect. Compliance with income tax regulations, use of passwords to limit data access, and generation of reports to facilitate variance analysis are all important controls related to financial reporting.
Which of the following is not true regarding audit documentation for a specific audit?
A. Audit documentation should indicate which member(s) of the audit team performed
and reviewed the audit work.
B. Audit documentation should demonstrate compliance with quality control standards.
C. Audit documentation should demonstrate compliance with the standards of fieldwork.
D. Audit documentation should be sufficient to enable members of the audit team with
supervisory responsibilities to understand the nature, timing, extent, and results of
auditing procedures performed.
Choice “2” is correct. 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.
Choice “1” is incorrect. Audit documentation should indicate which parties performed and reviewed the work.
Choice “3” is incorrect. Audit documentation should demonstrate compliance with the standards of fieldwork. It should indicate an appropriate level of planning and supervision, that a sufficient understanding of the entity and its environment, including its internal control, was obtained, and that a sufficient level of appropriate evidence was obtained.
Choice “4” is incorrect. Audit documentation should clearly indicate the work performed and the evidence obtained.
While auditing the financial statements of a nonissuer, a CPA was requested to change the
engagement to a review in accordance with Statements on Standards for Accounting and
Review Services (SSARS) because of a scope limitation. If the CPA believes the client’s
request is reasonable, the CPA’s review report should:
I. Refer to the scope limitation that caused the change.
II. Describe the auditing procedures that have already been applied.
A. Neither I nor II.
B. I only.
C. Both I and II.
D. II only.
Choice “1” is correct. If the CPA believes the client’s request is reasonable, he/she must comply with the standards for a review and issue an appropriate report. The report should not refer to the original engagement, to any auditing procedures performed, or to the scope limitation.
Choices “2”, “4”, and “3” are incorrect, based on the above explanation.
Which of the following is a factor in the control environment?
A. Segregation of duties.
B. Performance reviews.
C. Information processing.
D. Management’s philosophy and operating style.
Choice “4” is correct. The COSO framework for internal control consists of five interrelated components. Management’s philosophy and operating style is a factor in the control environment. The control environment sets the tone of the organization and originates with management and those charged with governance.
Choice “1” is incorrect. Segregation of duties is a factor of control activities. Control activities is another component of the COSO framework, and consists of control policies and procedures.
Choice “2” is incorrect. Performance reviews is a factor of control activities.
Choice “3” is incorrect. Information processing is a factor of information and communication.
Which one of the below statements best describes the concept of materiality?
A. Information that is likely to be viewed by a reasonable investor as altering the mix of
available information.
B. Information that is not likely to influence the decisions of a reasonable investor.
C. Information that meets strict quantitative thresholds.
D. Information that directly impacts the income statement.
Choice “1” is correct. According to the U.S. Supreme Court, information is material if there is a substantial likelihood that the information would be viewed by a reasonable investor as having significantly altered the total mix of available information.
Choice “2” is incorrect. Information is material if it is likely to influence the decisions of a reasonable investor.
Choice “3” is incorrect. Materiality is not determined by the use of strict quantitative thresholds. The determination of materiality may differ from client to client. Materiality must be determined using both quantitative and qualitative factors.
Choice “4” is incorrect. Information can be material if it influences the user’s decision about any of the financial statements.
The responsibility to establish, maintain and monitor internal controls is that of the entity's: A. External auditor. B. Internal auditor. C. Management. D. Accounting department.
Choice “3” is correct. The entity’s management is responsible for establishing, maintaining, and monitoring the entity’s internal controls, considering whether those controls are operating as intended, and modifying controls as conditions change.
Choice “1” is incorrect. The (external) auditor is required to obtain sufficient knowledge of internal control, but is not responsible for establishing, maintaining, and/or monitoring internal control.
Choice “2” is incorrect. The internal auditors contribute to the monitoring of the entity’s activities, but are not responsible for establishing or maintaining them.
Choice “4” is incorrect. The accounting department is not responsible for establishing, maintaining, and monitoring internal controls.
Which of the following is an analytical procedure that an auditor most likely would perform
when planning an audit?
A. Confirming bank balances with the financial institutions.
B. Recalculating inventory extensions of physical inventory counts.
C. Comparing the current-year account balances for conformity with predictable patterns.
D. Scanning accounts receivable for amounts over credit limits.
Choice “3” is correct. During planning, analytical procedures consist of a review of data aggregated at a high level, with an objective of enhancing the auditor’s understanding of the client. Comparing the current-year account balances for conformity with predictable patterns would fulfill this purpose.
Choice “1” is incorrect. Confirmation of bank balances is a substantive audit procedure (not an analytical procedure) that would be performed during the fieldwork stage of the audit.
Choice “2” is incorrect. Recalculating inventory extensions of physical inventory counts is a detailed procedure related to one specific account, and it would be performed during the fieldwork stage of the audit.
Choice “4” is incorrect. Scanning accounts receivable for amounts over credit limits is a detailed procedure related to one specific account, and it would be performed during the fieldwork stage of the audit.
In assessing the objectivity of internal auditors, the independent CPA who is auditing the
entity’s financial statements most likely would consider the:
A. Internal auditing standards developed by The Institute of Internal Auditors.
B. Results of the tests of transactions recently performed by the internal auditors.
C. Tests of internal control activities that could detect errors and fraud.
D. Materiality of the accounts recently inspected by the internal auditors.
Choice “1” is correct. Objectivity is reflected by the organizational level to which the internal auditor reports as well as by policies prohibiting audits of areas where the internal auditor lacks independence. In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity’s financial statements considers information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (such as those developed by The Institute of Internal Auditors).
Choice “2” is incorrect. Results of the tests of transactions recently performed by the internal auditor would aid the auditor in evaluating the internal auditor’s competence rather than his or her objectivity.
Choice “3” is incorrect. Tests of internal control activities that could detect errors and fraud would not help the CPA assess the objectivity of the internal auditor.
Choice “4” is incorrect. The materiality of the accounts recently inspected by the internal auditors would not help the CPA assess the objectivity of the internal auditor.
If an auditor is obtaining an understanding of an issuer’s information and communication
component of internal control, which of the following factors should the auditor assess?
A. The oversight responsibility over financial reporting and internal control by the board
or audit committee.
B. The classes of transactions in the issuer’s operations that are significant to the
issuer’s financial statements.
C. The philosophy and operating style of management to promote effective internal
control over financial reporting.
D. The integrity and ethical values of top management.
Choice “2” is correct. The classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements are typically assessed when the auditor is obtaining an understanding of the information and communication component of internal control.
Choice “1” is incorrect. The oversight responsibility over financial reporting and internal control by the board or audit committee is typically assessed when the auditor is obtaining an understanding of the control environment component of internal control.
Choice “3” is incorrect. The philosophy and operating style of management to promote effective internal control over financial reporting are typically assessed when the auditor is obtaining an understanding of the control environment component of internal control.
Choice “4” is incorrect. The integrity and ethical values of top management are typically assessed when the auditor is obtaining an understanding of the control environment component of internal control.
As part of a fraud audit, a CPA wishes to identify employees with invalid Social Security
numbers in the client’s payroll-transaction data. Which of the following audit tests of controls
using computer-assisted audit techniques would best meet the objective?
A. Randomly selecting 25 payments from the payroll report and comparing the results to
employee Social Security cards in the human resources records.
B. Obtaining statistics on the population of the payroll file to identify unusual pay amounts
to employees.
C. Comparing the payroll transaction file to the employee master file to extract payments
to employees who are not in the employee master file.
D. Comparing Social Security numbers paid in the payroll transaction file to a file of
government-authorized Social Security numbers.
Choice “4” is correct. Comparing Social Security numbers in the payroll transaction file to a file of government-authorized Social Security numbers would help identify invalid Social Security numbers.
Choice “1” is incorrect. Randomly selecting 25 payments from the payroll report and comparing the results to employee Social Security cards in the human resources records appears to be a manual rather than computer-assisted audit technique (especially because the sample size is relatively low). In addition, comparing Social Security numbers in the payroll transaction file to a file of government-authorized Social Security numbers would be the best way to identify invalid Social Security numbers.
Choice “2” is incorrect. This audit technique would not help the auditor identify invalid Social Security numbers. However, this procedure may help the auditor identify unusual pay amounts.
Choice “3” is incorrect. Comparing the payroll transaction file to the employee master file would not provide information about invalid Social Security numbers. However, this procedure may help the auditor test the completeness of the master file.
Objectives of an entity include: I. Information and Communication Systems II. Reliable Financial Reporting III. Effective and Efficient Operations A. Yes Yes Yes B. No Yes Yes C. No Yes No D. Yes No No
Choice “2” is correct. No - Yes - Yes. An entity’s objectives consist of financial reporting, operations, and compliance. Information and communication is a component of internal control, not an objective.
Choices “1”, “3”, and “4” are incorrect, per the above.
The objective of performing analytical procedures in planning an audit is to identify the
existence of:
A. Acts of noncompliance with laws and regulations that went undetected because of
internal control weaknesses.
B. Recorded transactions that were not properly authorized.
C. Related party transactions.
D. Unusual transactions and events.
Choice “4” is correct. The objective of performing analytical procedures during planning is to discover unusual transactions or events that may have an impact on the planning of the financial statement audit.
Choice “1” is incorrect. Analytical procedures are not effective in identifying acts of noncompliance with laws and regulations that went undetected due to internal control weaknesses.
Choice “2” is incorrect. Analytical procedures are not effective as tests of controls to identify unauthorized transactions.
Choice “3” is incorrect. Analytical procedures are not effective in identifying related party transactions.
Which of the following statements about internal control is correct?
A. The establishment and maintenance of internal control is an important responsibility of
the internal auditor.
B. Exceptionally strong internal control is enough for the auditor to eliminate substantive
tests on a significant account balance.
C. The cost-benefit relationship is a primary criterion that should be considered in
designing internal control.
D. Properly maintained internal control reasonably ensures that collusion among
employees cannot occur.
Choice “3” 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. Establishing and maintaining internal control is the responsibility of management – not the internal auditor.
Choice “2” 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.
Choice “4” is incorrect. Even a properly maintained system of internal control is unable to reasonably ensure that collusion among employees cannot occur.
Which of the following factors should an external auditor obtain updated information about
when assessing an internal auditor’s competence?
A. The reporting status of the internal auditor within the organization.
B. The educational level and professional experiences of the internal auditor.
C. Whether policies prohibit the internal auditor from auditing areas where relatives are
employed.
D. Whether the board of directors, audit committee, or owner-manager oversees
employment decisions related to the internal auditor.
Choice “2” is correct. The educational level and professional experiences of the internal auditor help the external auditor assess an internal auditor’s competence.
Choice “1” is incorrect. The reporting status of the internal auditor within the organization helps the external auditor assess an internal auditor’s objectivity.
Choice “3” is incorrect. Objectivity is reflected by policies prohibiting the internal auditor from auditing areas where relatives are employed.
Choice “4” is incorrect. Objectivity is reflected by the organization level to which the internal auditor reports, which includes who oversees the employment decisions related to the internal auditor.
