1.10.19 Flashcards
When an auditor obtains an understanding of the entity and its environment, including its internal control, which of the following is the most likely order of performing the steps A through C below?
A = Tests of controls B = Preparation of a flowchart documenting the understanding of the client’s internal control C = Substantive procedures
BAC
The auditor obtains an understanding of internal control. This understanding may include flowcharting the system. Next, the auditor must assess the risks of material misstatement, whether due to fraud or error. In response to this assessment, the auditor performs further audit procedures. These procedures ordinarily include tests of controls to evaluate their operating effectiveness when (1) the auditor intends to rely on the controls to determine substantive procedures or (2) substantive procedures alone are insufficient.
In planning the audit engagement, the auditor should consider each of the following except
The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.
Although the nature of the services expected to be rendered (e.g., a report on consolidated or consolidating financial statements or on compliance with contractual provisions) should be considered when establishing the understanding with the client, determining the kind of opinion to be expressed occurs after the completion of audit procedures.
The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley’s financial statements. The primary objective of this audit is to provide assurance to the
Investors in Donley securities.
An audit’s primary objective is to provide assurance to the external users of financial statements that they present fairly, in all material respects, the financial position, results of operations, and cash flows of the company. Users include creditors, investors, and potential investors.
Which of the following is an auditor least likely to perform in planning a financial statement audit?
Selecting a sample of vendors’ invoices for comparison with receiving reports.
Selecting a sample of vendors’ invoices for comparison with receiving reports is a test of details (a substantive procedure). It is a further audit procedure performed to test relevant assertions.
In evaluating an entity’s accounting estimates, one of the auditor’s objectives is to determine whether the estimates are
Reasonable in the circumstances.
The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the applicable reporting framework.
Which of the following statements is correct concerning an auditor’s use of the work of an actuary in assessing a client’s pension obligations?
The auditor is required to understand the objectives and scope of the actuary’s work.
The auditor should obtain an understanding of the expertise of the auditor’s specialist sufficient to (1) determine the nature, scope, and objectives of the work and (2) evaluate the adequacy of the work for the auditor’s purposes.
An auditor is required to establish an understanding in writing with a client regarding the services to be performed for each engagement. This understanding generally includes
The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in control that come to the auditor’s attention.
The understanding with the client regarding services to be performed is typically documented in an engagement letter. An engagement letter should indicate that a traditional financial statement audit is not designed to provide assurance on internal control. However, the auditor is responsible for ensuring that those charged with governance are aware of any significant deficiencies or material weaknesses in control, that come to his or her attention.
Which of the following ratios would be the least useful in reviewing the overall profitability of a manufacturing company?
Net income to working capital.
The ratio of net income to working capital is not typically considered in evaluating overall profitability. It does not give a broad measure of how effectively the firm is managed because it does not consider noncurrent assets and liabilities.
When an office supply company is unable to fill an order completely, it marks the out-of-stock items as back ordered on the customer’s order and enters these items in a back order file that management can view or print. Customers are becoming disgruntled with the company because it seems unable to keep track of and ship out-of-stock items as soon as they are available. The best approach for ensuring prompt delivery of out-of-stock items is to
Match the back order file to goods received daily.
Reconciling the back order file to shipments received daily would identify unfilled orders for appropriate action.
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
Understating the sales journal.
Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation.
First Federal S&L has an online, real-time system, with terminals installed in all of its branches. This system will not accept a customer’s cash withdrawal instruction in excess of $1,000 without the use of a “terminal audit key.” After the transaction is authorized by a supervisor, the bank teller then processes the transaction with the audit key. This control can be strengthened by
Online recording of the transaction on an audit override sheet.
Control over large cash withdrawals can be improved further by separately recording these transactions. The additional documentation provides an audit trail that the auditor may follow to determine whether the special procedures have been followed.
Which of the following is a factor in the control environment?
Management’s philosophy and operating style.
The control environment is the foundation for all other control components. It provides discipline and structure, sets the tone of the organization, and influences the control consciousness of employees. Its components include (1) participation of those charged with governance, (2) integrity and ethical values, (3) organizational structure, (4) management’s philosophy and operating style, (5) assignment of authority and responsibility, (6) human resource policies and practices, and (7) commitment to competence.
Which of the following constitutes a potential risk associated with the use of information technology in an entity’s internal control structure?
Unauthorized changes to the system.
Use of IT creates specific risks to internal control. They include unauthorized (1) access to data (e.g., recording of unauthorized, inaccurate, or nonexistent transactions), (2) changes in data, and (3) changes in systems or programs.
For all audits of financial statements made in accordance with generally accepted auditing standards, the auditor should apply analytical procedures to some extent as
Risk assessment procedures:
Substantive procedures:
In the review phase:
Yes
No
Yes
The auditor obtains an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. Risk assessment procedures are performed to obtain the understanding. They include (1) inquiries of management and others within the entity, (2) analytical procedures (analytical procedures used to plan the audit), and (3) observation and inspection. Substantive procedures are designed to detect material misstatements in assertions. They consist of tests of details and substantive analytical procedures. Analytical procedures are required to be used as risk assessment procedures (AU-C 315). However, the decision to use analytical procedures as substantive procedures is based on the auditor’s judgment about their effectiveness and efficiency in reducing the risks of material misstatement to an acceptably low level (AU-C 520).
Which of the following would be least likely to be comparable between similar corporations in the same industry line of business?
Earnings per share.
Similar companies in the same industry that are equally profitable may have quite different earnings per share because of differences in shares outstanding and in other aspects of their capital structures.
