1.19.19 Flashcards
What is the most likely course of action that an auditor would take after determining that performing substantive procedures on inventory will take less time than performing tests of controls?
Perform only substantive procedures on inventory.
According to AU-C 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, the auditor may in some cases perform only substantive procedures and exclude the effect of controls from the relevant risk assessment. For example, (1) testing the operating effectiveness of controls may be inefficient, or (2) risk assessment procedures may not have identified effective controls relevant to the assertions. In these cases, the auditor does not intend to rely on controls.
In which of the following instances would it be appropriate for the auditor to refer to the work of an appraiser in the auditor’s report?
An adverse opinion is expressed based on a difference of opinion between the client and the auditor’s external specialist about the value of certain assets.
An auditor’s external specialist has expertise in a field other than accounting or auditing. Expertise in a field other than accounting or auditing may include valuation of nonfinancial assets, such as land and buildings, jewelry, or antiques. If, after considering the work of the auditor’s external specialist, the auditor concludes that managements’ assertions are materially misstated, a qualified or adverse opinion should be expressed. When the opinion is modified, the auditor may report the work of the external specialist when it is relevant to understanding the opinion modification (AU-C 620).
Decision tables differ from program flowcharts in that decision tables emphasize
Logical relationships among conditions and actions.
A decision table identifies the contingencies considered in the description of a problem and the appropriate actions to be taken relative to those contingencies. Decision tables are logic diagrams presented in matrix form. Unlike flowcharts, they do not present the sequence of the actions described.
Which of the following procedures is not used in tests of controls over purchases?
Confirm inventory held in public warehouses.
The confirmation of inventory held in public warehouses is a substantive procedure performed on an account balance in the purchasing cycle.
Risk assessment procedures
Assess the risks of material misstatement of financial statements.
Risk assessment procedures are performed to obtain an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement at the levels of (1) the financial statements as a whole and (2) relevant assertions.
A CPA wishes to determine how various issuers have complied with the disclosure requirements in a new Accounting Standards Update. Which of the following information sources would the CPA most likely consult for this information?
AICPA Accounting Trends & Techniques.
Practical guidance for conducting accounting and audit engagements can be found in various nonauthoritative publications, such as Accounting Trends and Techniques, which describes current practice regarding corporate financial accounting and disclosure policies. It is a useful source for practitioners in industry and public practice. This annual AICPA publication is based on a survey of the annual financial reports of over 600 public companies.
To safeguard the assets through effective internal control, accounts receivable that are written off should be transferred to
A separate ledger.
Accounts receivable that are written off should be transferred to a separate ledger. This ledger should be maintained by the accounting department and periodically reviewed to determine if any of the accounts have become collectible.
For certain controls, such as assignment of authority and responsibility, documentary evidence may not exist. An auditor would most likely test the controls by
Observation & inquiry.
When documentary evidence does not exist, evidence about the effectiveness of the operation of controls may be obtained through such methods as observation, inquiry, or computer-assisted techniques. Inquiry alone, however, will not ordinarily provide sufficient appropriate evidence to support the conclusion that the control is operating effectively.
For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor who is assessed to be both competent and objective?
Materiality of misstatements:
Evaluation of significant accounting estimates:
No
No
The responsibility to report on financial statements is solely the auditor’s. It cannot be shared with internal auditors. Because the auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about (1) assessments of RMMs, (2) materiality of misstatements, (3) sufficiency of tests performed, (4) evaluation of significant accounting estimates, and (5) other matters affecting the auditor’s report always should be those of the auditor.
Who establishes generally accepted auditing standards?
Auditing Standards Board and the Public Company Accounting Oversight Board.
AICPA Code of Professional Conduct requires adherence to standards issued by bodies designated by the AICPA Council. The Auditing Standards Board (ASB) is the body designated to issue auditing standards. They are in the form of Statements on Auditing Standards (SASs). The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002. It establishes by rule auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. The PCAOB is required to cooperate with the AICPA and other groups in setting auditing standards and may adopt their proposals. Nevertheless, the PCAOB is authorized to amend, modify, repeal, or reject any such standards. A number of auditing standards have been issued to date, the most significant requiring opinions on internal control for public companies.
Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true?
Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft.
Inherent risk is the susceptibility of an assertion about a transaction class, account balance, or disclosure that could be material, individually or combined with other misstatements, before consideration of any related controls. Some assertions and related balances or classes of transactions have greater inherent risk. Thus, cash has a greater inherent risk than less liquid assets.
When the operating effectiveness of a control is not evidenced by written documentation, an auditor should obtain evidence about the control’s effectiveness by
Inquiry and other procedures such as observation.
Tests of controls evaluate their operating effectiveness. However, for some controls, documentation may not be available or relevant. For example, documentation of operation may not exist for (1) some factors in the control environment, such as assignment of authority and responsibility, or (2) some controls, such as computer controls. In such cases, evidence about effectiveness of operation may be obtained through inquiry combined with other procedures, e.g., observation or computer-assisted audit techniques.
In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that
involves an estimate.
To assist the auditor in evaluating the effect of misstatements accumulated during the audit and in communicating misstatements to management and those charged with governance, the auditor may find it useful to distinguish between factual misstatements, judgmental misstatements, and projected misstatements. Judgmental misstatements are differences arising from the judgments of management about accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate.
An auditor’s engagement letter most likely would include a statement that
Limits the auditor’s responsibility to detect fraud and error.
The terms of the engagement should be documented in an engagement letter that states the (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) applicable financial reporting framework, and (5) expected form and content of audit reports. An engagement letter should be sent by the CPA to the prospective client on each engagement, audit or otherwise. Because of the inherent limitations of the audit and of internal control, the risk of not detecting some material misstatements, whether due to fraud or error, is unavoidable. This risk exists even if the audit is in accordance with GAAS.
An auditor generally tests the segregation of duties related to inventory by
Personal inquiry and observation.
The segregation of duties reduces the opportunity for an individual to perpetrate and conceal fraud or error in the normal course of his or her duties. Authorization of transactions, recording of transactions, and custody of assets should be segregated. The best evidence that controls based on segregation of duties are operating as planned is provided by the auditor’s own observation and inquiries.
