CPA AUDIT REVIEW #3 Flashcards
Which procedure is most effective in reducing attestation risk?
Examination of evidence.
An Auditor’s summary in their audit documentation facilitates
- Reviews of the audit documentation
- Auditor’s consideration of significant findings and issues.
- Determination of whether any individual audit objective cannot be achieved that will prevent achievement of the overall audit objectives.
Should audit evidence be persuasive or conclusive?
Persuasive Evidence.
In most cases, evidence that is obtained to enable an auditor to draw reasonable conclusions on which to base the opinion is necessarily persuasive rather than conclusive.
In gathering evidence in the performance of substantive procedures, the auditor most likely relies on persuasive evidence.
What are examples of audit evidence gathered by the client?
Shipping documents and Receiving Reports.
Shipping documents and receiving reports are a result of the operations of the client. As goods are shipped to customers, a shipping document is prepared by the client. As goods are received from vendors, a receiving report is prepared by the client.
What is the permanent file?
The permanent section of the auditor’s audit documentation usually contains copies of important entity documents.
The permanent file section of the audit documentation is kept for each audit client.
What’s usually included in the permanent file?
- A Flowchart of the internal control procedures.
- Organizational Charts
- Copies of bond and note indentures.
- Questionnaires
- Information about internal control
- Articles of incorporation
- Engagement Letter
- analyses from previous audits of accounts of special importance to the auditor
The current file includes
A copy of the financial statements.
What is the current file?
The current file of the auditor’s audit documentation includes all working papers applicable to the current year under audit. A copy of the financial statements must be included in the current file because the amounts included in these statements are the focus of the audit.
Which audit technique most likely will provide an auditor with the most assurance about the effectiveness of the operation of a control?
Observation of client personnel.
Are confirmations a form of test of control, substantive procedure or analytical procedure?
Confirmations is a substantive procedure.
To obtain an understanding of a continuing client in planning an audit, an auditor most likely would
Read internal audit reports.
The auditor would use risk assessment procedures to gain an understanding including reading:
- Internal Audit reports
- Interim Statements
- Quarterly Reports
4.Minutes of Board Meetings.
What is a SOC 1 Type 1 Report?
The report expressing an opinion on the description of controls implemented and their design.
A service auditor’s responsibility is to express an opinion on the fairness of management’s description of the system and the suitability of the design of the controls in meeting the objectives.
The Service does not test the effectiveness of the controls.
Which audit procedure would an auditor be least likely to perform using a generalized computer audit program?
Investigating inventory balances for possible obsolescence.
Because obsolescence is a matter of judgment requiring consideration of many factors not reflected in the accounting records, audit software is unlikely to be useful for this task.
Accounts receivable turnover ratio
Sales/Avg. Accounts Receivable
The tick mark þ likely indicates that the amount was traced to the
Outstanding check list of the applicable bank reconciliation.
What happens when the auditor reconciles the accounts receivable ledger to the general ledger control account?
An Auditor will most likely learn an opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period. By reconciling the accounts receivable ledger to the general ledger control account, transfer misstatements will be identified.
Which audit procedure would an auditor most likely perform to test controls relating to management’s assertion concerning the completeness of sales transactions?
Inspect the entity’s reports of prenumbered shipping documents that have not been recorded in the sales journal.
Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to
Expand tests of collectability.
Whenever collections of receivables have slowed, the auditor should determine the effects on the allowance for doubtful accounts.
When should negative accounts receivable forms be used?
When the:
- Risk of material misstatements is low.
- There are many small balances
3.Consideration by the recipient is likely.
“Negative confirmations provide less persuasive audit evidence than positive confirmations.
Unreturned requests provide no explicit evidence that the intended parties received them and verified the correctness of the information stated.
To test the completeness assertion for cash receipts, the Auditor should..
Trace the daily remittance list to the last validated deposit ticket for the period.
Which procedure prevents payment for goods not received if there isn’t a receiving function?
Vendor invoices should be approved by a departmental supervisor other than the employee ordering the goods.
The departmental supervisors are the most likely to be aware of the goods received by their departments. Moreover, separating ordering authority from payment authority will prevent unauthorized purchases.
Concerning the content of audit documentation..
It is appropriate to use calculator tapes with names or explanations on the tapes rather than writing separate lists onto working papers.
The AICPA standards applies to the audit of
Non-issuers.
A secondary result of the auditor’s understanding of internal control for a nonissuer is that the understanding may
Bring to the auditor’s attention possible control conditions required to be communicated to the client.
The auditor is not required to search for significant deficiencies or material weaknesses in internal control.
What is the primary result of the Auditor’s understanding of internal control?
Develop evidence to support the assessed risks of material misstatement.
What are the main positions in an IT Department?
- Systems Analyst
- Programmer
- Operator
- Librarian
- Security
What are the application controls?
- Input Controls
2.Logic Checks - Processing Checks
What are the input controls?
These are meant to reduce mistakes when data is being ENTERED into the system.
1. Batch Totals
2. Hash Totals
3. Record Count
What are the logic checks?
These are certain computer checks that can determine if data has been entered incorrectly.
- Limit Test
- Validity Tests
- Missing data checks
What are the processing checks?
These are processes to verify the processing of data is accurate and authorized.
- Checkpoints: for long processes
An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all
Vendor Invoices.
If billed comes before received - Invoices.
If received comes before billed - Receiving reports.
An auditor testing investments would ordinarily use analytical procedures to ascertain the reasonableness of the
Completeness of recorded investment income.
The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to
Materials requisitions
What is vouching?
Vouching is the examination of documents to obtain audit evidence about recorded amounts or transactions.
What are the two directions of testing?
Records to documents - Vouching.
Documents to records - Tracing
What is a key procedure to detect unrecorded debt?
Re-calculate interest expense based on recorded debt and compare it with recorded interest expense.
A proper purchase cutoff is intended to
- Assure inclusion of the goods in inventory.
- The recognition of a liability in the period in which the client acquired title to the goods.
What does a bond trust indenture include?
- The date of issue & date of maturity of the bond issue.
- The amount of the bonds.
- Interest rates
- Payment dates
- Descriptions of collateral.
- Provisions for conversions or retire.
7.Trustee Duties
- Sinking Fund requirements
- Restrictions on the borrower
Testing from inventory listing to inventory tags provides evidence of which assertion?
Existence.
Validity (being valid) refers to the existence assertion.
What is a overriding internal control principle?
Responsibility for the performance of each duty must be fixed.
An audit plan for noncurrent debt should include steps that require
Examining bond trust indentures.
What is a trust indenture?
The bond trust indenture contains information about contractual arrangements made with bondholders, such as (1) the face amount of the bonds, (2) interest rates, (3) payment dates, (4) descriptions of collateral, (5) provisions for conversion or retirement, (6) trustee duties, and (7) sinking fund requirements. The auditor should examine any bond trust indenture to determine that the client is meeting the conditions of the contract and is in compliance with the law.
Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion of
Accuracy, valuation, and allocation
Subsequent events occurring after the balance sheet dates has what effect on the financial statement and auditor’s report?
A disclosure is made to the financial statement and is not adjusted and once the disclosure is made then the Auditor’s report does not need to be modified.
What is one disadvantage of Monetary Unit Sampling (statistical sampling method)?
MUS eliminates the need for auditor’s judgment.
What are the advantages of Monetary Unit Sampling?
If no misstatements are expected, MUS will usually result in a smaller sample size than classical variables sampling.
MUS is easier to use than classical variables sampling
MUS automatically stratifies the population.
What is the Monetary Unit Sampling simplified sample size formula?
N =BV × CF/TM
n = sample size
BV = recorded amount of the account
CF = appropriate confidence factor
TM = Tolerable misstatement
How does a increase in tolerable misstatement affect the sample size?
Decreases sample size
How does a increase in RMM affect the sample size?
Increases the sample size
What is used to determine the sample size for a test of controls?
(1) the tolerable rate of deviations from the control being tested
(2) the expected actual rate of deviations
(3) the allowable risk of overreliance
How do you calculate the allowance for sampling risk?
Achieved upper deviation rate - sample deviation rate
Sampling deviation rate = # of deviations in the sample tested / total sample tested.
The opinion section in an auditor’s report for a nonissuer should include a statement that
Identifies the applicable financial reporting framework and its origin.
When a report has to be re-issued which date should be included on the report?
The date of the prior period report
A closely held manufacturing company must disclose all of the following…
- LIFO Reserves
- Pledged Inventory
- Changes in methods of accounting for inventory
If the Auditor is unable to observe the physical count of beginning inventory then a unmodified opinion is issued on which financial statement?
The Balance Sheet
