IC- Concepts and Standards Flashcards
List the advantages of narratives (memos) to document the auditor’s understanding of internal controls.
1-Tailored to client;
2-Can be as detailed or as general as desired;
3-Easy to prepare;
4-Easy to read.
What is the purpose of performing a walkthrough?
Obtain some feedback as to whether the way the auditor has understood (and documented) the entity’s internal controls is consistent with the way the entity is actually processing such transactions.
List the disadvantages of narratives (memos) to document the auditor’s understanding of internal controls.
- Writing such a memo is rather unstructured, lacking a systematic approach;
- It may be rather easy to overlook relevant internal control issues.
Identify 3 ways auditors might document their understanding of internal controls?
- Flowcharts of transaction cycles;
- Internal control questionnaires;
- Narrative write-ups (memos).
Identify 2 reasons for assessing control risk at the maximum level.
1-The auditor believes that the design of internal control is ineffective; or
2-The auditor believes that reliance on internal control (and performing applicable tests of control) is not an efficient audit strategy compared to a wholly substantive audit approach.
When should the auditor assess the design effectiveness of internal control?
In planning every audit under GAAS, as a basis for determining the nature, timing, and extent of further audit procedures.
When should the auditor assess the operating effectiveness of internal control?
Whenever the auditor contemplates a reliance strategy (which means the same thing as “assessing control risk at less than the maximum level”) and only after performing the appropriate tests of control.
What are some inherent limitations of internal controls?
- Faulty human judgement
- human error
- collusion by two or more people
- inappropriate management override of controls
Definition of substantive procedures and what they comprise?
An audit procedure designed to detect MM at the assertion level. They comprise:
Tests of details (transactions, account balances,etc)
Substantive analytical procedures (analytical procedures required at the start and review, while substantive procedures during the audit use professional judgement)
List some examples of appropriate responses by the auditor to risks of material misstatement at the financial statement level.
Assign more experienced staff to the engagement;
Provide closer supervision;
Use specialists;
Use more unpredictable audit procedures.
What are the 3 different types of audit procedures?
Risk assessment procedures
Tests of control
Substantive procedures
Define “significant deficiency.”
A deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
What is meant by the term deficiency in design?
When a control necessary to meet the control objective is missing, or when the control objective is not always met, even if the control operates as designed.
Define material weakness.
A deficiency (or combination of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis.
Describe the timing of the required communication of significant deficiencies in internal control.
Under AICPA professional standards, written communication is required no later than 60 days after the audit report release date (including matters communicated orally during the audit).
