Reports on Auditing Engagements -- Audit of Internal Control Integrated with an Audit of Financial Statements Flashcards
An accountant has been engaged to report on an entity’s internal controls without performing an audit of the financial statements. What restrictions, if any, should the accountant place on the use of this report?
A. The accountant does not need to place any restrictions on the use of this report.
B. This report should be restricted for use by the audit committee.
C. This report should be restricted for use by a specified regulatory agency.
D. This report should be restricted for use by management.
A.
When an accountant has been engaged to report on an entity’s internal controls without performing a financial statement audit, he or she does not need to place any restrictions on the use of the report unless management does not present its written assertion in a separate report to accompany the practitioner’s report.
In reporting on a nonissuer’s internal control over financial reporting, an auditor should include a paragraph that describes the
A. Documentary evidence regarding the control environment factors
B. Changes in internal control since the prior report
C. Potential benefits from the auditor’s suggested improvements
D. Inherent limitations of any internal control structure
D.
A paragraph describing the inherent limitations of any internal control structure is one of required elements of the auditor’s report on the examination of internal control. The other answers are not required elements.
Each of the following statements is correct regarding the likely sources of potential misstatements in an integrated audit of a nonissuer, except:
A. An evaluation of the entity’s information technology risk and controls should be performed separately from the top-down approach.
B. The controls that management has implemented to address potential sources of misstatements should be identified
C. An understanding of how transactions are initiated, authorized, processed, and recorded should be achieved
D. Walkthroughs are frequently the most effective way of understanding sources of potential misstatements.
A.
The auditor should use a “top-down” approach to identify risks, and select and evaluate controls. The auditor should verify his or her understanding of the risks in the company’s processes. The auditor’s objectives are to (1) understand the flow of transactions (including the effect of information technology) related to the relevant assertions, including how these transactions are initiated, authorized, processed, and recorded; (2) confirm that all the points within the company’s processes at which a material (individually or combined with other misstatements) misstatement could arise have been identified; and (3) Identify the preventative and detective controls that management has implemented. An effective method to achieve these objectives is to perform walk-throughs. The auditor follows a transaction from its origin to its reflection in the financial statements.
In an integrated audit of a nonissuer, an auditor should issue an adverse opinion on the effectiveness of an entity’s internal control in which of the following situations?
A. The financial statements are misstated
B. A material weakness exists
C. The entity may not continue as a going concern
D. The auditor was asked by the client to provide the report to another practitioner.
B.
If there is a material weakness, the auditor should express an adverse opinion. The auditor is prohibited from expressing an opinion on management’s assertion and should report directly on the effectiveness of internal control. The auditor should determine the effect of an adverse opinion on the auditor’s opinion on the financial statements and disclose whether the auditor’s opinion on the financial statements was affected by the material weakness. None of the other situations require an adverse opinion.
In accordance with the standards of the PCAOB, which of the following conditions must be met in order for an auditor to report on whether a previously reported material weakness continues to exist?
Management supports its assertion with sufficient evidence, including documentation.
Management accepts responsibility for the effectiveness of internal control over operations.(should be over financial reporting)
Management evaluates the effectiveness of the specific control(s) that address the material weakness using the same control criteria management used for its most recent annual assessment of internal control over financial reporting and its stated control objective(s).
A. Only I
B. Only II
C. Only I and III
D. I, II, and III
C.
According to PCAOB standards, all of the following conditions must be met for an auditor to complete this type of engagement: (1) management accepts responsibility for the effectiveness of internal control over financial reporting (ICFR) (not over operations); (2) management evaluates the effectiveness of the specific control(s) that it believes addresses the material weakness using the same control criteria that management used for its most recent annual assessment of ICFR and management’s stated control objective(s); (3) management asserts that the specific control(s) identified is effective in achieving the stated control objective; (4) management supports its assertion with sufficient evidence, including documentation; and (5) management presents a written report that will accompany the auditor’s report that contains all the required elements.
Which of the following statements apply to an audit of internal control over financial reporting conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB)?
I. The auditor should consider the effect of compensating controls in assessing whether the objectives of internal control over financial reporting have been achieved.
II. While management is responsible for the company’s internal control, the auditor should also assess the effectiveness of the board of directors’ and the audit committee’s oversight as part of evaluating the control environment.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
C.
The auditor should consider the effect of compensating controls when determining if a deficiency constitutes a material weakness. The compensating control should be judged effective enough to prevent or detect a material misstatement the be considered to have a mitigating effect. Ineffective oversight by the audit committee of the company’s external financial reporting and internal control over financial reporting (ICFR) should be regarded as an indication of a material weakness in ICFR.
Brown, CPA, has accepted an engagement to examine the effectiveness of internal control over financial reporting of Crow Company (a nonissuer). Crow Company’s written assertion about the effectiveness of internal control should be presented
I.In a separate report that will accompany Brown’s report
II.In a representation letter to Brown
A. Neither I nor II
B. Either I or II
C. I only
D. II only
C.
Management must present its written assertion about the effectiveness of the entity’s internal control in a report that accompanies the auditor’s report.
Snow, CPA, was engaged by Master Co. to examine and report on management’s written assertion about the effectiveness of Master’s internal control over financial reporting. Snow’s report should state that
A. Because of inherent limitations of any system of internal control, errors or fraud may occur and not be detected.
B. Management’s assertion is based on criteria established by the American Institute of Certified Public Accountants.
C. The results of Snow’s tests will form the basis for Snow’s opinion on the fairness of Master’s financial statements in conformity with GAAP.
D. The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.
A.
The report should include a paragraph stating that, because of inherent limitations of any internal control, errors or fraud may occur and not be detected. This statement would be made regardless of whether management makes its assertion in a separate report or in a representation letter to the practitioner.
Which of the following requirements must an auditor meet to express an opinion on a public company’s effectiveness of internal control over financial reporting as of a point in time and taken as a whole?
I.The auditor must obtain evidence that internal control over financial reporting has operated effectively for the entire period covered by the company’s financial statements.
II.The auditor must test the design and operating effectiveness of controls that the auditor ordinarily would not test if expressing an opinion only on the financial statements.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
B.
To express an opinion on internal control over financial reporting (ICFR) effectiveness as of a point in time, the auditor should obtain evidence that ICFR has operated effectively for a sufficient period of time, which may be less than the entire period covered by the company’s financial statements. To express an opinion on ICFR effectiveness taken as a whole, the auditor must obtain evidence about the effectiveness of controls over all relevant assertions. This requires the auditor to test the design and operating effectiveness of controls that the auditor ordinarily would not test if expressing an opinion only on the financial statements.
How do the scope, procedures, and objective of an engagement to examine the design and operating effectiveness of an entity’s internal control over financial reporting compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?
Scope Procedures Objective
A. Similar Different Similar
B. Different Similar Similar
C. Different Different Different
D. Different Similar Different
D.
Although the examination of an entity’s internal control over financial reporting should be integrated with the audit of financial statements, the two engagements have different objectives and generally differ in scope.
