Performing Specific Procedures to Obtain Evidence -- Inquiry of Management and Others Flashcards
Inquiry alone is not sufficient to test the operating effectiveness of controls. Accordingly, other audit procedures are performed in combination with inquiry. Which procedure combined with inquiry generally provides the least assurance?
A. Inquiry and inspection
B. Inquiry and reperformance
C. Inquiry and observation
D. Inquiry and recalculation
C.
Inquiry and observation generally may provide the least assurance of these alternatives because an observation is pertinent only at the point in time at which it is made.
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?
A. The estimated remaining useful lives of plant assets were revised upward.
B. Plant assets were retired during the year.
C. The prior year’s depreciation expense was erroneously understated.
D. Overhead allocations were revised at year-end.
B.
When plant assets are retired, the accumulated depreciation account is debited for the amount of depreciation that has been recorded for those assets, which could be a satisfactory explanation for significant debits to this account. When the estimated remaining useful life of a plant asset is revised upward, the calculation for current and future depreciation is revised to reflect the new estimate of remaining useful life; therefore, accumulated depreciation is not affected. If the prior year’s depreciation expense was erroneously understated, a correction would require a credit, not a debit, to accumulated depreciation. Revisions in overhead allocations would not affect the accumulated depreciation accounts.
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
A. Inquiry of client personnel
B. Inspection of documents and reports
C. Observation of client personnel
D. Preparation of system flowcharts
D.
The CPA examiners generally recognize four types of tests of internal controls to determine the degree of operating effectiveness: inquiries of appropriate entity personnel, inspection of documents and reports, observation of the application of specific internal control policies and procedures, and re-performance of the application of the policy or procedures by the auditor. System flowcharts may document the auditor’s understanding of internal control, but flowchart preparation provides little assurance about the documented activity’s operating effectiveness.
Editor note: It is important with CPA exam questions (especially ones like these) to carefully read the question. The question is asking for the LEAST assurance, so the answer choice that doesn’t quite align with the others may be a clue as to the correct answer.
An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?
A. Observation and inspection of records
B. External confirmation and reperformance
C. Inquiry and inspection of records
D. Analytical procedures and reperformance
C.
The question describes inquiries and inspection of records. It describes the auditor interviewing the controller (making inquiries) and inspecting the records (the verification that the reconciliation was properly prepared and included appropriate sign-offs) after the procedure had taken place, so it was not observation. A confirmation, which is a specific type of inquiry, is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item—this was not described. The auditor did not perform the control procedure (the reconciliation) so it wasn’t reperformance. And no analytical procedures are described.
Management’s responses to inquiries can be corroborated by each of the following, except
A. Visits to the entity’s premises and plant facilities
B. Inspection of documents and internal control manuals
C. Preparation of the summary of unadjusted differences
D. Observation of entity activities and operations
The correct answer is (C).
A summary of unadjusted differences summarizes uncorrected misstatements of the financial statements whose effects are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Preparation of summary of unadjusted differences cannot be used as a document for audit evidence and is irrelevant to corroborate management’s responses to inquiries. Management’s responses to inquiries can be corroborated by Site visits, Inspection of documents, and Observation of activities/operations.
Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?
A. Make inquiries to understand the potential consequence of the deviation
B. Assume that the deviation is an isolated occurrence without audit significance
C. Report the matter to the next higher level of authority within the entity
D. Increase sample size of tests of controls
A.
When deviations from prescribed controls are discovered, the auditor should make inquiries to understand the potential consequences of the deviation, i.e., the auditor should determine whether, on the basis of the audit work performed, the auditor has identified one or more deficiencies in internal control. And if the auditor has identified one or more deficiencies in internal control, the auditor should evaluate each deficiency to determine, on the basis of the audit work performed, whether, individually or in combination, they constitute significant deficiencies or material weaknesses. (If the auditor determines that a deficiency, or a combination of deficiencies, in internal control is not a material weakness, the auditor should consider whether prudent officials, having knowledge of the same facts and circumstances, would likely reach the same conclusion.) The auditor should never assume that a deviation is an isolated occurrence without audit significance.
Answers C. and D. may or may not be determined to be appropriate actions after the auditor has gained an understanding of the potential consequences; however, in determining whether the auditor has identified one or more deficiencies in internal control, the auditor may discuss the relevant facts and circumstances of the auditor’s findings with the appropriate level of management. The level of management with whom it is appropriate to discuss the findings is one that is familiar with the internal control area concerned and that has the authority to take remedial action on any identified deficiencies in internal control; in many cases this may not be answer C., the next higher level of authority within the entity.
“In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies.” The foregoing passage most likely is from a(an)
A. Audit inquiry letter to legal counsel
B. Representation letter
C. Audit committee’s communication to the auditor
D. Financial statement footnote disclosure
A.
The passage is a quote from a sample inquiry letter to legal counsel. It is rare to refer to “our auditors” in a letter to that auditor; it is more likely that a third party is being addressed using this language. The representation letter states that the financial statements are presented fairly in conformity with GAAP and that, “there are no…other liabilities or gain or loss contingencies that are required to be accrued or disclosed….” “That information was furnished to auditors” generally is inappropriate disclosure for footnotes to the financial statements.
