Obtaining Understanding of I/C Flashcards
When obtaining an understanding of an entity’s internal control, an auditor should concentrate on the substance of controls rather than their form because
The controls may be operating effectively but may not be documented.
Management may establish appropriate controls but not enforce compliance with them.
The controls may be so inappropriate that no re-liance is contemplated by the auditor.
Management may implement controls whose costs exceed their benefits.
Management may establish appropriate controls but not enforce compliance with them.
The requirement is to determine why an auditor should concentrate on the substance of procedures rather than their form when obtaining an understanding of an entity’s controls. Answer (b) is correct because management may establish appropriate controls but not act on them, thus creating a situation in which the form differs from the substance. Answer (a) is incorrect because documentation is not directly related to the issue of substance over form. Answer (c) is incorrect because inappropriate controls is only a part of an auditor concern; for example, a control may be appropriate, but it may not be operating effectively. Answer (d) is incorrect because while an auditor might suggest to management that the cost of certain controls seems to exceed their likely benefit, this is not the primary reason auditors are concerned with the substance of controls.
An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risks of material misstatements primarily to
Determine whether procedures and records concerning the safeguarding of assets are reliable.
Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized.
Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.
Determine the nature, timing, and further audit procedures.
Determine the nature, timing, and further audit procedures.
This answer is correct because the auditor uses the knowledge provided by his/her understanding of internal control and the assessed level of the risks of material misstatement in determining the nature, timing, and extent of further audit procedures.
Decision tables differ from program flowcharts in that decision tables emphasize
Ease of manageability for complex programs.
Logical relationships among conditions and actions.
Cost benefit factors justifying the program.
The sequence in which operations are performed.
Logical relationships among conditions and actions.
Decision tables include various combinations of conditions that are matched to one of several actions. In an internal control setting, the various important controls are reviewed and, based on the combination of answers received, an action such as a decision on whether to perform tests of controls is determined. Program flowcharts simply summarize the steps involved in a program. Answer (a) is incorrect because decision tables do not emphasize the ease of manageability for complex programs. Answer (c) is incorrect because while decision tables may be designed using various cost benefit factors relating to the various conditions and actions, they do not justify the program. Answer (d) is incorrect because program flowcharts, not decision tables, emphasize the sequence in which operations are performed.
Which of the following is not a typical question asked during a walk-through?
Have you ever been asked to override the process or controls?
What do you do when you find an error?
What is the largest fraudulent transaction you ever processed?
What kind of errors have you found?
What is the largest fraudulent transaction you ever processed?
This answer is correct because while auditors ask various questions related to fraud, they do not typically ask about an individual’s largest fraudulent transaction.
To obtain an understanding of a continuing client’s business, an auditor most likely would
Perform tests of details of transactions and balances.
Review prior year working papers and the permanent file for the client.
Read current issues of specialized industry journals.
Reevaluate the client’s internal control environment.
Review prior year working papers and the permanent file for the client.
The requirement is to determine the manner in which an auditor plans an audit of a continuing client. Answer (b) is correct because a review of prior year working papers and the permanent file may provide useful information about the nature of the business, organizational structure, operating characteristics, and transactions that may require special attention. Answer (a) is incorrect because tests of details of transactions and balances occur subsequent to planning. Answer (c) is incorrect because while reading specialized industry journals will help the auditor to obtain a better understanding of the client’s industry, it is likely to be less helpful than reviewing the working papers. Answer (d) is incorrect because a reevaluation of the client’s internal control environment occurs subsequent to the ordinal planning of the audit.
When preparing a record of a client’s internal control, the independent auditor sometimes uses a flowchart, which can best be described as a
Pictorial presentation of the flow of instructions in a client’s internal computer system.
Diagram which clearly indicates an organization’s internal reporting structure.
Graphic illustration of the flow of operations which is used to replace the auditor’s internal control questionnaire.
Symbolic representation of a system or series of sequential processes.
Symbolic representation of a system or series of sequential processes.
This answer is correct because the flowchart prepared during the consideration of internal control is a symbolic representation of a system of sequential processes. It can be used in lieu of the internal control questionnaire which has the same purpose (i.e., to prepare a record of prescribed internal control).
The auditor would be least likely to be concerned about internal control as it relates to
Land and buildings.
Common stock.
Shareholder meetings.
Minutes of board of directors’ meetings.
Shareholder meetings.
This answer is correct because a client’s internal control will not relate directly to shareholder meetings. CPAs will often attend the shareholder meetings and be aware of what has transpired, but important matters at such meetings are generally publicly available.
In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to
Document the auditor’s understanding of the entity’s internal control.
Search for significant deficiencies in the operation of internal control.
Perform tests of controls to evaluate the effectiveness of the entity’s internal control.
Determine whether controls are suitably designed to prevent or detect material misstatements.
Document the auditor’s understanding of the entity’s internal control.
The requirement is to identify the statement that represents a requirement when an audit of financial statements in accordance with generally accepted accounting principles is performed. Answer (a) is correct because AU-C 315 requires that the auditor document the understanding of the entity’s internal control. Answer (b) is incorrect because while an auditor might find significant deficiencies in the operation of internal control, no such search is required. Answer (c) is incorrect because an auditor might use a substantive approach in performing an audit and thereby perform few (if any) tests of controls. Answer (d) is incorrect because while auditors must obtain knowledge of internal control sufficiently to identify types of potential misstatements, they are not required to obtain the detailed knowledge of internal control suggested by this reply
Which of the following controls would an auditor be least likely to review?
Segregation of the asset-handling and recordkeeping functions.
Company policy regarding credit and collection efforts.
Cost records classified by date of product introduction.
Authorization of additions to plant and equipment.
Cost records classified by date of product introduction.
This answer is correct because an auditor is usually not concerned with the date a product was introduced.
An auditor considers existing internal control in order to
Determine the extent of analytical procedures which should be performed.
Determine the further audit procedures which should be performed.
Ascertain whether management has committed fraud.
Ascertain whether any employees have incompatible functions.
Determine the further audit procedures which should be performed.
This answer is correct because the auditor’s understanding of internal control allows him/her to determine the nature, timing, and extent of further audit procedures.
An auditor would most likely be concerned with controls that provide reasonable assurance about the
Efficiency of management’s decision-making process.
Appropriate prices the entity should charge for its products.
Methods of assigning production tasks to employees.
Entity’s ability to process and summarize financial data.
Entity’s ability to process and summarize financial data.
This answer is correct because the controls relevant to an audit pertain to the entity’s ability to record, process, summarize, and report financial data consistent with the assertions embodied in the financial statements.
Which of the following computer documentation would an auditor most likely utilize in obtaining an understanding of internal control?
System flowcharts.
Record counts.
Program listings.
Record layouts.
System flowcharts.
This answer is correct because a systems flowchart provides a graphic representation of internal control and therefore may help the auditor to obtain an understanding.
An auditor obtains knowledge about a new client’s business and its industry to
Make constructive suggestions concerning improvements to the client’s internal control.
Develop an attitude of professional skepticism concerning management’s financial statement assertions.
Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.
Understand the events and transactions that may have an effect on the client’s financial statements.
Understand the events and transactions that may have an effect on the client’s financial statements.
The requirement is to determine why an auditor obtains knowledge about a new client’s business and its industry. Answer (d) is correct because obtaining a level of knowledge of the client’s business and industry enables the CPA to obtain an understanding of the events, transactions, and practices that, in the CPA’s judgment, may have a significant effect on the financial statements. Answer (a) is incorrect because providing constructive suggestions is a secondary, and not the primary, reason for obtaining knowledge about a client’s business and industry. Answer (b) is incorrect because while a CPA must develop an attitude of professional skepticism concerning a client, this attitude is not obtained by obtaining knowledge about the client’s business and industry. Answer (c) is incorrect because information on the business and industry of a client will provide only limited information in determining whether financial statements are materially misstated, and numerous other factors are considered in evaluating audit findings.
Which of the following is not a major reason for maintaining an audit trail for a computer system?
Deterrent to fraud.
Monitoring purposes.
Analytical procedures.
Query answering.
Analytical procedures.
The requirement is to identify the reply that is not a major reason for maintaining an audit trail for a computer system. Answer (c) is correct because analytical procedures use the outputs of the system, and therefore the audit trail is of limited importance. Answer (a) is incorrect because an audit trail may deter fraud since the perpetrator may realize that his or her act may be detected. Answer (b) is incorrect because an audit trail will help management to monitor the computer system. Answer (d) is incorrect because an audit trail will make it much easier to answer queries.
One important reason why a CPA, during the course of an audit engagement, prepares internal control flowcharts is to
Reduce the need for inquiries of client personnel concerning the operations of internal control.
Depict the organizational structure and document flow in a single chart for review and reference purposes.
Assemble the internal control findings into a comprehensible format suitable for analysis.
Prepare documentation that would be useful in the event of a future consulting engagement.
Assemble the internal control findings into a comprehensible format suitable for analysis.
This answer is incorrect because the entire organizational structure and document flow of a large company usually cannot be depicted in a single flowchart.
