Study Unit 8: questions Flashcards
The auditor should perform tests of controls when the auditor’s assessment of the risks of material misstatement includes an expectation of the operating effectiveness of internal control or when
Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level.
For some RMMs, the auditor may determine that it is not feasible to obtain sufficient appropriate audit evidence only from substantive procedures. These RMMs may relate to routine, significant transactions subject to highly automated processing with no documentation except what is recorded in the IT system. In such circumstances, the controls over the RMMs are relevant to the audit. Thus, the auditor should obtain an understanding of, and test, the controls.
The risks of material misstatement (RMMs) should be assessed in terms of
Financial statement assertions.
The auditor’s objective is to identify and assess the RMMs, whether due to fraud or error, at the financial statement and relevant assertion levels. This objective is achieved through understanding the entity and its environment, including its internal control. The understanding provides a basis for designing and implementing responses to the assessed RMMs (AU-C 315 and AS No. 12).
Once a deviation is discovered by an auditor, what should be done?
(s)he should investigate it further by making inquiries to understand the potential consequences of the deviation.
Regardless of the assessed risks of material misstatement, an auditor should perform some
Substantive procedures to restrict detection risk for significant transaction classes.Regardless of the assessed RMMs (or the effectiveness of the relevant controls), the auditor should design and perform substantive procedures for all relevant assertions related to each material transaction class, account balance, and disclosure.
What are the 4 procedures used in tests of controls?
Reperformance
Inspection
Iquiry
Observation
A nonissuer audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?
Adopt a substantive audit approach.
For some RMMs, the auditor may determine that it is not feasible to obtain sufficient appropriate audit evidence only from substantive procedures. These RMMs may relate to routine, significant transactions subject to highly automated processing with no documentation except what is recorded in the IT system. In such circumstances, the controls over the RMMs are relevant to the audit. Thus, the auditor should:
obtain an understanding of, and test, the controls.
In performing tests of controls, the auditor will normally find that the rate of deviations in the sample:
The rate of deviations in the sample exceeds the rate of error in the accounting records.
When testing controls, the auditor is directly concerned with deviations from specific controls. Failure to comply with a control does not necessarily result in an error in the records. For example, the absence of an authorization signature does not necessarily mean that the transaction was improperly recorded. Accordingly, the rate of deviations from a control normally exceeds the error rate in the records.
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?
Test the operating effectiveness of such controls in the current audit.
Controls that have changed must be tested for operating effectiveness before they can be relied on.
Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at the financial statement level is an example of
An overall response.
Overall responses apply to the assessed RMMs at the financial statement level. The following are examples of overall responses:
(1) An emphasis on professional skepticism in evidence gathering and evaluation;
(2) increased supervision;
(3) assignment of staff with greater experience or expertise;
(4) greater unpredictability in the choice of further audit procedures; and
(5) changing the nature, timing, and extent of audit procedures, such as modifying the nature of a procedure to obtain more persuasive evidence (AU-C 330).
As the acceptable level of detection risk for a given audit risk increases, the audit effort devoted to substantive procedures may be reduced. The auditor may change the nature, timing, or extent of substantive procedures, for example, by changing the timing to:
an interim date.
The objective of tests of details of transactions performed as tests of controls is to
Evaluate whether internal controls operated effectively.
What is parallel simulation?
Parallel simulation is the computer-assisted audit technique in which the auditor inserts the auditor’s version of the client’s program to reprocess client data and compare the output with the client’s output.
An auditor most likely should test for the presence of unauthorized computer program changes by running a
Source code comparison program.
The best way to test for unauthorized computer program changes is to examine the program itself. By comparing a program under his or her control with the program used for operations, the auditor can determine whether unauthorized changes have been made.
