Incorrect questions Flashcards
Which of the following is a component of internal control?
Financial reporting.
Operating effectiveness.
Risk assessment.
Organizational structure.
Risk assessment.
This answer is correct because risk assessment is a component of internal control—the other four components are (1) the control environment, (2) control activities, (3) the information system relevant to financial reporting and (4) the monitoring of controls.
The auditor faces a risk that the examination will not detect material misstatements which occur in the accounting process. In regard to minimizing this risk, the auditor primarily relies on
Substantive tests.
Tests of controls.
Internal control.
Statistical analysis.
Substantive tests.
This answer is correct because the purpose of substantive tests is to obtain evidence as to the validity and the propriety of accounting treatment of transactions and balances or, conversely, of errors or irregularities. Thus, the auditor relies on substantive tests to minimize the risk of failure to detect material misstatements which occur in the accounting process.
A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor’s
Understanding of the reasons for the change in auditors.
Methodology used in applying sampling techniques.
Opinion on subsequent events that have occurred since the balance sheet date.
Perception of the competency and reliance on the client’s internal audit function.
Understanding of the reasons for the change in auditors.
This answer is correct. Inquiries ordinarily include questions on integrity of management, disagreements with management, and communications with the audit committee regarding fraud, illegal act, and internal control related matters.
In obtaining an understanding of an entity’s internal control structure policies and procedures that are relevant to audit planning, an auditor is required to obtain knowledge about the
Design of the policies and procedures pertaining to the internal control structure elements.
Effectiveness of the policies and procedures that have been placed in operation.
Consistency with which the policies and procedures are currently being applied.
Control procedures related to each principal transaction class and account balance.
Design of the policies and procedures pertaining to the internal control structure elements.
In obtaining an understanding of an entity’s internal controls that are relevant to audit planning, an auditor is required to obtain knowledge about the design of relevant internal controls pertaining to financial reporting in each of the five internal control components. Note that only those internal controls which impact the financial statements are to be considered. It is not necessary to understand and evaluate all of an entity’s internal controls.
The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the
Factors that raise doubts about the auditability of the financial statements.
Operating effectiveness of internal control policies and procedures.
Risk that material misstatements exist in the financial statements.
Possibility that the nature and extent of substantive tests may be reduced.
Risk that material misstatements exist in the financial statements.
Correct! The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that material misstatements exist in the financial statements. Assessing control risk and inherent risk helps the auditor identify where misstatements might exist; the auditor then performs auditing procedures to detect those misstatements.
Which of the following procedures would an auditor most likely perform to verify management’s assertion of completeness?
Compare a sample of shipping documents to related sales invoices.
Observe the client’s distribution of payroll checks.
Confirm a sample of recorded receivables by direct communication with the debtors.
Review standard bank confirmations for indications of kiting.
Compare a sample of shipping documents to related sales invoices.
This answer is correct because comparison of a sample of shipping documents to recorded sales invoices will provide evidence on whether all items shipped were recorded on sales invoices, which ultimately leads to the recording of a sale (completeness); thus, if no sales invoice is prepared it is doubtful that a sale will be recorded, even though goods have been shipped.
Which of the following are sources of safeguards that might reduce a threat of noncompliance with the code to an acceptable level?
Safeguards created by the profession.
Safeguards implemented by the client.
Safeguards implemented by the firm.
All three choices provided.
All three choices provided.
Because the three choices provided are all examples of sources of safeguards, this is the best answer.
Which of the following statements is correct regarding characteristics required of an engagement quality reviewer under PCAOB auditing standards?
A. Only a partner of the registered public accounting firm conducting the audit can serve as an engagement quality reviewer.
B. An individual outside of the registered public accounting firm becomes an “associated person” of the registered public accounting firm when receiving compensation from the firm for performing the engagement quality review.
C. There is no requirement that the engagement quality reviewer must be independent from the client involved, since the engagement quality reviewer cannot make engagement team decisions or otherwise assume any responsibilities of the engagement team.
D. The engagement quality reviewer is required to be a partner in a public accounting firm, regardless of whether the reviewer is from within the firm or outside the firm responsible for the audit engagement subject to the engagement quality review.
An individual outside of the registered public accounting firm becomes an “associated person” of the registered public accounting firm when receiving compensation from the firm for performing the engagement quality review.
The PCAOB (specifically, AS Section 1220) states: “An outside reviewer who is not already associated with a registered public accounting firm would become associated with the firm issuing the report if he or she . . . (1) receives compensation from the firm issuing the report for performing the review or (2) performs the review as agent for the firm issuing the report.”
Which of the following most likely would cause an auditor to consider whether a client’s financial statements contain material misstatements?
Management did not disclose to the auditor that it consulted with other accountants about significant accounting matters.
The chief financial officer will not sign the management representation letter until the last day of the auditor’s fieldwork.
Audit trails of computer-generated transactions exist only for a short time.
The results of an analytical procedure disclose unexpected differences.
The results of an analytical procedure disclose unexpected differences.
Correct! Analytical procedures are a category of “substantive” audit procedures, and unexpected differences relative to the auditor’s expectations may direct the auditor’s attention to the possibility of a material misstatement.
The GAO’s ethical rules include a Conceptual Framework for identifying threats to compliance that roughly parallels the AICPA Code of Professional Conduct’ similar framework. Which of the following types of threats to compliance is not included in the AICPA’s Conceptual Framework?
Undue influence threats.
Management participation threats.
Structural threats.
Familiarity threats.
Structural threats.
Correct! Structural threats are unique to the GAO standards. The worry is that the auditor’s placement within a government entity, in combination with the structure of the auditee, will impact the auditor’s ability to perform work and report results objectively.
