When IT Gets Tough II

Question 1

Which computer-assisted auditing techniques allows fictitious and real transactions to be processed together without the knowledge of client operating personnel?

Answer 1

The Integrated Test Facility (ITF)

It allows “dummy” transactions to be processed at the same time as live transactions; and can test transactions without the computer operator knowing

Question 2

WHAT may an auditor provide negative assurance on in a comfort letter engagement?

Answer 2

Whether the entity’s unaudited interim financial information complies;

• as to form with the accounting requirements of the Securities Act of 1933

Question 3

What may be a reason for a significant drop in the accounts receivable turned over ratio from Year 1 to Year 2?

Answer 3

Fictitious sales in Year 2

Why? - Because a “Fictitious sale” would increase both the numerator and the denominator

Remember - Any adding an equal amount to the numerator and denominator decreases the fraction WHEN it is greater than 1.0

Question 4

What is a possible reason for in increase in Accounts Receivable from Year 1 to Year 2?

Answer 4

The company is more aggressively collecting customer accounts

Why? - Because more aggressive collection policies will result in the entity effectively collecting more of their accounts which will reduce Accounts Receivable and INCREASE the A/R Turnover Ratio

Question 5

HOW would the CPA (i.e. the auditor) best test the reasonableness of dividend income from investments in issuers (i.e. Public Companies)?

Meaning - What evidence would allow him the ability to re-compute the dividend income?

Answer 5

BY electronically accessing the details of dividend records on the Internet

Why? - Because standard investment advisory services publish dividend records for all listed stocks which is available on the internet

Thus this allow the auditor to independently re-compute the client’s reported dividend income

Question 6

WHAT is an example of an engagement in which a CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements?

Answer 6

WHEN providing assurance on investment performance statistics prepared by an investment company on established criteria

WHY? - Because in an attest engagement, a CPA is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party (i.e. investment performance statistics prepared by an investment company)

Remember: SSAEs apply only to attest engagements for which no specific standards (e.g., SASs or SSARSs) apply

Question 7

A written management representation letter on WHAT would be the auditor’s best source of corroborative information of a client’s intention?

Answer 7

Information of a client’s intention to:

• Discontinue a line of business

Why? - Because discontinuing a line of business is an example of a matter about which other procedures may provide little evidence - Meaning this “written representation” may be necessary as confirmation of management’s intent

Remember - Written management representations complement, but do not substitute for, other auditing procedures

Question 8

WHAT is one purpose of establishing quality control policies and procedures for deciding whether to accept new clients?

Answer 8

To provide reasonable assurance that the firm has the resources to undertake new engagements

Meaning - A CPA firm should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement

Note - This “consideration” should also involve the CPA firms reasonable assurance of their ability to comply with applicable requirements

Question 9

WHAT procedure would an auditor usually NOT perform related to newly identified related party transactions outside the normal course of business?

Answer 9

Obtaining an;

• Understanding of the controls over authorization and approval of such transactions

Why? - Because these significant transactions outside the normal course of business most likely have a high assessed risk of material misstatement

Meaning - The auditor would be very limited in his test of controls and would focus more on substantive testing of transactions

Question 10

What are examples of audit documentation generated by the client?

Answer 10

Shipping documents and receiving reports

Why? - Because Shipping documents and receiving reports are a result of the operations of the client

Meaning, shipping document are prepared by the client as goods are shipped; and

• A receiving report is prepared by the client as goods are received from vendors

Question 11

WHAT total is used as a batch control to verify the accuracy of posting cash remittances in updating a computerized accounts receivable file?

Answer 11

Cash deposits plus discounts taken by customers

WHY? - Because this total should include the total amount of reductions in accounts receivable (i.e. discounts taken)

THUS, the total of the cash deposits plus the discounts taken by customers should equal the total reduction in accounts receivable for the batch of transactions processed

Question 12

HOW can a CPA (i.e. the auditor) best test if user identification and password controls are functioning as designed?

Answer 12

BY examining a sample of password holders and access authority to determine whether they have access authority incompatible with their other responsibilities

WHY? - Because employees with access authority to process transactions that change records should not also have asset custody or program modification responsibilities

THUS, the auditor should test whether that password authority is consistent with other assigned responsibilities

Question 13

WHAT is a reliable analytical approach to verification of the year-end financial statement balance of a wholesale business?

Answer 13

Verifying commission expense by multiplying sales revenue by the company’s standard commission rate

WHY? - Because if the wholesaler uses a standard commission rate, commission expense should be related to sales revenue

NOTE: The auditor should also compare actual with budgeted and prior year amounts

Question 14

WHAT would be least likely included in legal counsel’s response to the auditor’s letter of inquiry?

Answer 14

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded

Why? - Because the client’s Legal Counsel neither has the knowledge nor the expertise to make such a judgment. This is the CPA’s Responsibility

Question 15

What is an important consideration regarding the use of external confirmations to obtain audit evidence?

Answer 15

A factor for an auditor to consider when designing confirmation requests is the assertion being tested

Why? - Because this is affects the design of the external confirmation request directly relate to the response rate and the reliability of the evidence obtained

Question 16

WHAT would be considered literature officially established accounting principle, according to the AICPA Code of Professional Conduct?

Answer 16

The FASB Accounting Standards Codification

Why? - Because this is considered a source of authoritative guidance for all public and nonpublic nongovernmental entities

Question 17

What is a matter generally included in an auditor’s engagement letter?

Answer 17

Management’s responsibility for the entity’s compliance with laws and regulations

NOTE: The Engagement Letter’s primary purpose is to provide written record of the agreement with the client as to the services to be provided by the auditor

Question 18

What would be considered a good reason an auditor should consider observing a client’s distribution of regular payroll checks?

Answer 18

Separation of payroll duties is not effective enough to reduce control risk

Why? - Because a surprise observation of the client’s payroll distribution is especially desirable when;

• the various phases of payroll are not sufficiently segregated

Question 19

What would NOT be included in the accountant’s documentation of a preparation engagement?

Answer 19

A statement about whether the statements were fairly presented

WHY? - Because the Preparation Engagement does not involve an expression of any form of an opinion (e.g. gathering evidence about the fairness of the financial statements)

Question 20

WHAT would be considered an Attest Engagement?

Answer 20

Issuing a report about a firm’s compliance with laws and regulations

Remember: These types of engagements usually involve the auditor reporting on the responsible party’s written assertion (i.e. compliance with laws and regulations)