12.28.18 Flashcards
Usually, the decision to notify parties outside the client’s organization regarding noncompliance with laws and regulations is the responsibility of the
Management.
Deciding whether to contact parties other than personnel within the client’s organization about noncompliance with laws and regulations is the responsibility of management. However, the auditor’s responsibility to report externally may be expanded in special engagements. For example, in audits of governmental units in accordance with the Single Audit Act, the auditor may be required to report on the unit’s compliance with laws and regulations applicable to federal financial assistance programs (AU-C 250).
A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm’s standards of quality. To achieve this goal, the firm most likely would establish procedures for
Reviewing documentation of the work performed and reports issued.
The engagement performance element of quality control includes policies and procedures that cover planning, performing, supervising, reviewing, documenting, and communicating the results of each engagement. Objectives of supervision include establishing procedures for (1) planning engagements, (2) maintaining the firm’s standards of quality, and (3) reviewing documentation of the work performed and reports issued.
Which of the following is an example of an inherent risk that an auditor should consider?
Technological developments that may render inventory obsolete.
Inherent risk is the susceptibility of a financial statement assertion to a material misstatement before consideration of any related controls. Inherent risk is higher for some assertions and related transactions, balances, and disclosures. For example, it may be higher for complex calculations or amounts with significant estimation uncertainty. Business risks also may affect inherent risk. For example, technological developments might make a product obsolete, causing inventory to be overstated.
Which of the following circumstances most likely will cause an auditor to consider whether material misstatements due to fraud exist in an entity’s financial statements?
Transactions selected for testing are not supported by proper documentation.
Fraud risk factors relate to misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. Each of these categories may be further classified according to the three conditions that ordinarily exist when fraud occurs: (1) incentives/pressures, (2) opportunities, and (3) attitudes/rationalizations. For example, an opportunity for misappropriation of assets may arise because of inadequate control over assets. This fraud risk factor is reflected by a lack of timely and appropriate documentation of transactions, such as credit memos for returns of goods.
When performing analytical procedures as risk assessment procedures, the auditor most likely would develop expectations by reviewing which of the following sources of information?
Unaudited information from internal quarterly reports.
Analytical procedures applied as risk assessment procedures (analytical procedures used to plan the audit) at the beginning of the audit may improve the understanding of the client’s business and significant transactions and events since the last audit. They also may identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit implications (AU-C 315). The unaudited information included in the quarterly reports will give the auditor a sufficient overview to identify areas that may represent specific audit risks.
Under the AICPA’s conceptual framework for independence, the member-client relationship is evaluated to determine whether independence in fact and appearance is jeopardized. This is considered
A risk-based approach.
The risk-based approach evaluates the risk that a CPA is not independent or is perceived by a reasonable and informed third party with knowledge of all relevant information as not independent. That risk must be reduced to an acceptable level to establish independence. Risk is acceptable when threats are acceptable. They may be acceptable because of the types of threats and their potential effect. Moreover, threats may be sufficiently mitigated or eliminated by safeguards. Threats are acceptable when it is not reasonable to expect that they will compromise professional judgment.
Iherent risk and control risk differ from detection risk in which of the following ways?
Inherent risk and control risk exist independently of the audit.
Audit risk consists of the risks of material misstatement (inherent risk combined with control risk) and detection risk. The RMMs are the entity’s risks, and detection risk is the auditor’s risk. Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a material misstatement. It is a function of the effectiveness of an audit procedure and its application by the auditor. Detection risk is the only component of audit risk that can be changed at the auditor’s discretion. (Inherent risk and control risk exist independently of the audit and cannot be changed by the auditor.)
An accountant has an immaterial direct financial interest in a nonpublic entity. The accountant is
Not independent and may not perform a review.
Independence is impaired if, during the period of the professional engagement, a covered member has any direct or any material indirect financial interest in the client. Materiality is therefore irrelevant when the interest is direct. Thus, the accountant is not independent, and a review or audit may not be performed.
Audit plans should be designed so that
The audit evidence gathered supports the auditor’s conclusions.
The auditor is responsible for collecting sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the opinion. Audit plans describe the steps involved in that process. Thus, the evidence should support the auditor’s conclusions.
An auditor discovers that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that
Fictitious credit sales have been recorded during the year.
The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increases. Fictitious sales increase both the numerator and denominator. Adding an equal amount to both the numerator and denominator decreases a fraction greater than 1.0. For example, adding 1 to both parts of the fraction 3 ÷ 2 decreases it to 4 ÷ 3. The turnover ratio will decrease still more in the next period because fictitious items will continue to increase receivables (a real account) but not sales (a nominal account).
Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?
Management is interested in maintaining the entity’s earnings trend by using aggressive accounting practices.
Fraud risk factors relate to misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. Each of these categories may be further classified according to the three conditions that ordinarily exist when fraud occurs: (1) incentives or pressures, (2) opportunities, and (3) attitudes or rationalizations. For example, excessive pressure may exist to meet the expectations of third parties (e.g., analysts, investors, and creditors) regarding profitability or trends (AU-C 240).
According to the PCAOB, which of the following tax services may be provided jointly with the audit of an issuer’s financial statements without impairing independence?
Reviewing a proposed transaction and informing the client of the tax consequences.
When the client is an issuer, PCAOB and SEC independence standards apply. Under these standards, tax compliance services preapproved by the audit committee are permitted.
During the initial planning phase of an audit, a CPA most likely would
Discuss the timing of the audit procedures with the client’s management.
The first step in the audit process is the auditor’s decision whether to accept a client. After having decided to perform an audit, the auditor enters the initial planning phase. During initial planning, an auditor should, among other things, meet with the client to agree on the type, scope, and timing of certain aspects of the engagement (e.g., observation of inventory).
In a financial statement audit, substantial consideration must be given to potential fraud. The conditions for fraud ordinarily include
The ability to rationalize commission of fraud.
The three conditions that are normally present when fraud occurs are (1) incentives or pressures that give managers or employees a motive to commit fraud; (2) opportunity, such as ineffective controls or the ability to override controls; and (3) an ability to rationalize the commission of fraud, for example, because the individual has an attitude, character, or set of values permitting intentional misconduct. However, not all conditions need to exist or be observed. In particular, an auditor may not be able to observe that the third condition is present.
According to the ethical standards of the profession, a CPA’s independence would most likely be impaired if the CPA
Contracted with a client to supervise the client’s office personnel.
Supervising client employees in normal circumstances impairs independence. Supervising client personnel is a type of management function. Assuming management responsibilities impair independence, but providing advice, research, and recommendations does not.
