Deck 3

Question 1

What happens when reporting on internal control when performing an integrated audit of a nonissuer?

Answer 1

For nonissuers:

1. The auditors are required to report on both the company’s financial statements and on its internal control over financial reporting.
2. The auditor can issue two separate reports or one combined report. If a separate report is issued, each report must contain an other-matter paragraph making reference to the other report and indicating the nature of the opinion expressed.
3. The date of the report on internal control should coincide with the date of the audit report on the F/S

Question 2

What happens when the group engagement auditor accepts responsibility for the work performed by a component auditor?

Answer 2

The group engagement partner needs to contact the component auditor and review the audit program and working papers pertaining to that component.

Question 3

What is a component auditor?

Answer 3

An auditor who performs work on a component of financial information that will be used as audit evidence for the group audit.

Question 4

What does the group engagement team do if the component auditor is not independent or the group engagement team has serious concerns about professional competence?

Answer 4

The group engagement team should not use the work of the component auditor or make any reference to the component auditor in the auditor’s report

Question 5

Independence is not required on what types of engagements?

Answer 5

Compilation

Question 6

What is the concept of precision?

Answer 6

The statistical concept of precision is used to describe the auditor’s evaluation of sampling results by calculating the possible error in either direction.

Question 7

When would an auditor decide to decrease the acceptable level of risk?

Answer 7

Decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless the cost and effort of selecting additional sample items is low.

Question 8

When are negative confirmation most likely to be used in auditing A/R

Answer 8

1. When the assessed level of inherent risk and control risk is low
2. a large number of small account balances are being confirmed
3. there is no reason to expect the recipients of the request to ignore them

Question 9

When positive confirmations most likely to be used in auditing A/R

Answer 9

1. There is large individual accounts
2. There is expected errors or items in dispute
3. When internal control is weak.

Question 10

When assessing management’s plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:

Answer 10

1. The postponement of expenditures (including R&D)
2. Plans to dispose of assets
3. Plans to borrow money or restructure debt
4. Plans to increase ownership equity (sell stock)

Question 11

What is attribute sampling?

Answer 11

Attribute sampling examines the rate of occurrence in a sample: the attribute either exists or does not exist. Therefore, attribute sampling is more useful for tests of controls, like examination of time cards for proper approval.

Question 12

What items are explicitly included on an audit report expressing an unmodified opinion?

Answer 12

1. The auditor’s responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes identifying and assessing the risks of material misstatement and designing and performing audit procedures responsive to those risks.
2. The audit is conducted in accordance with auditing standards generally accepted in the United States of America.

Question 13

In assessing the objectivity of internal auditors, an independent auditor should:

Answer 13

When assessing the internal auditors’ objectivity, the auditor should obtain information about whether the internal auditor reports to an officer of sufficient status to ensure broad audit coverage and adequate consideration of, and action on, the findings and recommendations of the internal auditors. (ie. determine the organizational level to which the internal auditors report)

Question 14

What is a misappropriation of assets?

Answer 14

It involves theft of an entity’s assets when the effect of the theft causes the financial statements not to be presented in conformity with GAAP

Question 15

What should the auditor inquire about when identifying the risks of material misstatement due to fraud?

Answer 15

1. The auditor should inquiry whether management (not operating personnel) has communicated to those charged with governance(not management) regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud.

Question 16

What is variable sampling?

Answer 16

Used to determine whether a given account balance is reasonable

Question 17

What is one procedure to address the adequacy of presentation and disclosure for inventory of a nonissuer?

Answer 17

The auditor should determine that inventory-related obligations, such as inventory pledged under loan agreements, have been properly disclosed.

Question 18

What happens if control risk is assessed at a low level?

Answer 18

Test of controls would be required to evaluate the effectiveness of the internal controls to support that assessed level.

The need for some substantive tests of transactions is never eliminated.

Question 19

What are the assertions to audit payroll accrual?

Answer 19

1. Completeness: test the completeness of the payroll accrual when performing the search for unrecorded liabilities.
2. Valuation and Allocation: recalculate any year-end payroll accrual and compare the calculated amount to the reported accrual.
3. Existence” vouch amounts from the clients calculation of the payroll accrual to supporting documentation.
4. Rights and Obligations: examine supporting documentation to verify that the payroll accrual is an obligation of the entity.

Question 20

Do PCAOB standards require to audit and report on internal control?

Answer 20

YES- PCAOB standards require auditor to perform an integrated audit, which includes audits of both the financial statements and the effectiveness of internal control.

Question 21

What is top-down approach?

Answer 21

Top-down approach is used in selectin controls to test.

1. Evaluates overall risks at the financial statement level.
2. Considers controls at the entity level
3. Then focuses on accounts, disclosures, and assertions for which there is a reasonable possibility of material misstatement

Question 22

How to calculate sampling interval?

Answer 22

Tolerable misstatement/reliability factor

Question 23

How to calculate sample size?

Answer 23

Book value of population/ Sampling Interval

Always round up. For example if you number is 128.2 round up because you cannot audit .2

Question 24

What is in an agreed upon procedure report?

Answer 24

1. No assurance provided in an agreed upon procedures engagement
2. Report should identify the subject matter
3. the engaging party is responsible for the sufficiency of the procedures
4. Agreed upon procedure engagements fall under SSAE

Question 25

If the auditor discovers a material inconsistency with other information accompanying the financials, the auditor should communicate the matter with those charged with governance and then consider:

Answer 25

1. the implications of the auditor’s (ie. revising the report to include a separate “Other Information” section describing the material inconsistency
2. withhold the use of the report
3. withdraw from the engagement

Question 26

When does a control deficiency exist?

Answer 26

When the design or operation of a control does not allow management or employees, in the normal course of performing their duties, to prevent, detect and correct misstatements on a timely basis

1. Deficiency of Design- occurs when a necessary control is missing or when an existing control does not achieve the desired objective
2. Deficiency of Operation: occurs when a properly designed control does not operate as designed, or is perform by an inappropriate person

Question 27

When a predecessor auditor’s report is not presented, the successor auditor should indicate the following items:

Answer 27

1. That the statements were audited by a predecessor auditor, but do not name the predecessor auditor unless acquired by or merged with the successor.
2. The type of opinion expressed by the predecessor auditor and if the opinion was modified, the reason for the modification
3. The nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in the predecessor auditor’s report
4. The date of the predecessor auditor’s report

Question 28

What type of sample size does a lower risk of incorrect acceptance require:

Answer 28

greater sample size