AUD MCQ Notes Flashcards
What are the types of consulting services a CPA can provide?
Advisory Services EDP System Implementation Product Services Transaction Services Support Services Tax Consulting
Of the five full-time members of the Public Company Accounting Oversight Board (PCAOB), how many are CPAs?
As established by Title I of the Sarbanes-Oxley Act of 2002, exactly two of the five full-time members of the PCAOB must be CPAs.
Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?
If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings.
How often are firms that are registered with the Public Company Accounting Oversight Board (PCAOB) subject to periodic inspections?
For firms working with companies that issue securities to the public, the inspection process by the PCAOB takes the place of peer review. Firms that audit more than 100 companies that issue securities are inspected by the PCAOB annually. The rest of the CPA firms registered with the PCAOB will be inspected every three years.
Which organization has oversight over the audit of employee benefit plans?
The Department of Labor (DOL)
What are the 5 elements of quality control?
Quality control comprises the methods used to ensure that the firm meets its professional responsibilities to clients and others. There are five elements of quality control: (1) independence, integrity and objectivity; (2) personnel management; (3) acceptance and continuation of clients and engagements; (4) engagement performance; and (5) monitoring.
Which section of the Sarbanes-Oxley Act requires management to issue an internal control report?
Section 404 of the Sarbanes-Oxley Act requires auditors of public companies to assess and report on the effectiveness of internal control over financial reporting.
What is a test of details?
A test of details is a substantive test, which might include analytical procedures, but may also include other types of procedures.
Does an auditor have to state whether or not principles have been applied consistently in their report?
No, the auditor only has to identify circumstances when the client fails to consistently apply principles from year to year.
What are some of the difficulties encountered during the audit that should be communicated to those charged with Governance?
Significant delays in management providing required information
An unnecessarily brief time within which to complete the audit
Extensive unexpected effort required to obtain sufficient appropriate audit evidence
The unavailability of expected information
Restrictions imposed on the auditor by management
Management’s unwillingness to make or extend its assessment of the entity’s ability to continue as a going concern when requested
According to IFRS, what matters must be communicated to those in charge of Governance?
The auditor’s responsibilities in relation to the financial statement audit
The planned scope and timing of the audit
Significant timing of the audit
Auditor independence
What is a WebTrust?
An engagement in which a CPA is engaged to determine if a client’s website meets certain defined criteria
What is the purpose of an engagement letter?
To help avoid misunderstandings with respect to the engagement.
Generally accepted government auditing standards use which of the following terms to describe a professional requirement to comply with a standard or provide a special explanation for not doing so?
Presumptively mandatory requirement
What are some of the functions of an Audit Committee?
The committee typically:
selects and appoints the independent auditor,
assures that the auditor is independent,
reviews the nature and details of the engagement,
reviews the quality of the auditor’s work,
reviews the scope of the audit,
maintains lines of communication, and
helps solve any disagreements.
For what percentage of federal expenditures can an entity qualify as “low risk” under the “percentage of coverage” rule in the Single Audit Act Amendments of 2013?
20%.
What should the audit strategy involve?
The audit strategy should involve:
defining the scope of the audit (such as the basis of reporting, any industry-specific reporting requirements, and the locations of the entity);
determining reporting deadlines and key dates for expected communications with those charged with governance (this information helps to determine the timing of the audit); and
considering factors that direct the audit team efforts (such as materiality levels, preliminary identification of risks of material misstatement and material account balances, and recent industry or financial developments affecting the client).
Why would management choose not to correct an internal control weakness?
The cost to do so outweighs the benefits.
Which of the following terms identifies a requirement for audit evidence?
Appropriate
What are the types of inherent risks?
human errors due to misunderstanding of instructions,
mistake of judgment, carelessness, distractions, or fatigue,
collusion which circumvents the segregation of duties,
management override that may override the structure to commit fraud or misstate the financial statements, and
changing conditions that may weaken a system which was adequate before the change.
Inherent limitations means that, no matter how well designed and operated, internal controls cannot provide absolute assurance that an entity can achieve its financial, operational, and compliance objectives.
Which controls are considered application controls?
Application controls are classified as follows:
Input controls
Processing controls
Output controls
Control risk should be assessed in terms of?
financial statement assertions
The risk of material misstatement of accounting estimates increases with increases in the:
complexity and subjectivity of the estimation process,
lack of availability and reliability of relevant data,
number and significance of the assumptions that are made,
degree of uncertainty associated with the assumptions.
In auditing accounts payable, an auditor’s procedures most likely would focus primarily on which management assertion?
Completeness
What are some of the risks that IT systems pose?
Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both
Unauthorized access to data that may result in destruction of data or improper changes to data
Possibility of IT personnel gaining access privileges beyond those necessary to perform assigned duties
Unauthorized changes to data in master files
Failure to make necessary changes to systems or programs
Inappropriate manual intervention
Potential loss of data or inability to access data as required.
For effective internal control, the accounts payable department generally should perform what procedures?
Establish the agreement of the vendor’s invoice with the receiving report and purchase order.
The acceptable level of detection risk is inversely related to what?
Assurance provided by substantive tests.
What should an auditor do when control risk is assessed at the maximum level?
Document the assessment
If control risk (or the risk of material misstatement) is assessed at the maximum level, it means that the auditor cannot rely on the controls.
This assessment should be documented, as it helps the auditor to determine the nature, timing, and extent of further audit procedures (most likely performing more, rather than fewer, substantive tests of details in order to lower audit risk).
The control structure should be documented thoroughly as part of obtaining the understanding of the entity and its environment, including its internal control. Documenting it more extensively will do nothing to reduce the control risk. Likewise, performing more tests of controls will not assist the auditor if he or she knows that the controls cannot be relied upon.
What are some examples of application controls?
Input Controls
Processing Controls
Output Controls
