1.12.19 Flashcards
What is the primary objective of the fraud brainstorming session?
Assess the potential for material misstatement due to fraud.
The auditor should obtain reasonable assurance about whether the statements are free of material misstatement, whether due to fraud or error. The key members of the engagement team should discuss the potential for material misstatement. The discussion should include an exchange of ideas (brainstorming) about (1) how and where the statements might be susceptible to material misstatement due to fraud (“fraud risk”), (2) how assets might be misappropriated or financial reports fraudulently misstated, (3) how management could conceal fraudulent reporting (including override of controls), (4) how to respond to fraud risk, (5) known factors reflecting pressures/incentives/opportunities to commit fraud or an environment that permits rationalization of fraud, (6) an emphasis on the need to maintain professional skepticism, and (7) consideration of facts indicating manipulation of financial measures (e.g., earnings management).
During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor’s required response to the discovery?
The auditor should bring the transaction to the attention of an appropriate level of management.
Inconsequential fraud should be communicated to the appropriate level of management.
If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should
Raise or lower the materiality level as appropriate to the situation.
According to the PCAOB, the auditor may need to reevaluate the established materiality level(s) and tolerable misstatement. Changes in the circumstances or additional information may indicate a substantial likelihood that misstatements of amounts that differ significantly from the materiality level(s) established initially could influence the judgment of a reasonable investor. The reevaluation of materiality levels may result in higher or lower amounts. If so, the auditor must determine whether risk assessments and audit procedures need to be modified.
The PCAOB
May seek removal of a person from a registered firm.
The PCAOB has no injunctive power, but it may institute administrative proceedings. It may seek disassociation of a person from a registered firm, suspension (temporary or permanent) of the firm’s registration, or a penalty of up to $15 million.
An auditor is concerned about management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor’s concern?
Verifying that approved spending limits are not exceeded.
To determine whether management has overridden approvals, the auditor should compare actual expenditures with budgeted amounts.
Which of the following factors is least likely to affect the extent of the auditor’s understanding of the entity’s internal controls?
The amount of time budgeted to complete the engagement.
The understanding of internal control relevant to the audit helps the auditor to (1) identify types of potential misstatements, (2) identify factors affecting the risks of material misstatement, and (3) design further audit procedures. Thus, the auditor should understand the nature and characteristics of internal control, including its (1) purpose, (2) inherent limitations, (3) division into five components, and (4) manual and automated elements. Internal control addresses (1) the reliability of reporting, (2) the effectiveness and efficiency of operations, and (3) compliance with laws and regulations. How internal control is designed, implemented, and maintained to achieve its purpose varies with the entity’s size and complexity. The understanding of internal control also (1) identifies the controls relevant to the audit and (2) involves performing risk assessment procedures to (a) evaluate the design of controls and (b) determine whether they have been implemented (AU-C 315). Accordingly, the time budgeted for the audit is the factor least likely to affect the understanding of internal control.
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?
Assessment of inherent risk:
Assessment of control risk:
No
No
The auditor may use the internal auditor to provide direct assistance in the audit as long as the auditor supervises, reviews, evaluates, and tests the work of the internal auditor. However, an internal auditor, regardless of his or her competence and objectivity, should never make judgments about the audit work being conducted. All judgments, including assessments of the risks of material misstatement (inherent and control risk), should be made by the auditor.
Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?
Management is unwilling to permit inquiry of its legal counsel.
Client acceptance includes the continued evaluation of existing clients and the evaluation of new clients. Concluding that management lacks integrity or is uncooperative is one case in which the auditor should reject a potential client or end a relationship with an existing client. If management is unwilling to permit inquiry of its legal counsel, the auditor will most likely decline acceptance because of the scope limitation (inability to obtain sufficient appropriate evidence).
Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?
A CPA in public practice providing auditing and other attestation services.
According to the Principles of Professional Conduct, “A member in public practice should be independent in fact and appearance when providing audit and other attestation services.”
Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as
A discipline that attests to financial information presented by management.
The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP).
Which of the following procedures would least likely result in the discovery of possible noncompliance with laws and regulations?
Reviewing an internal control questionnaire.
Auditors should design the audit to provide reasonable assurance of detecting noncompliance having a material effect on the financial statements. Internal control questionnaires document the auditor’s understanding of internal control. Reviewing the responses to the questionnaire may reveal control deficiencies but not noncompliance.
An auditor who discovers that client employees have committed illegal activities that have a material effect on the client’s financial statements most likely would withdraw from the engagement if
The client does not take the remedial action that the auditor considers necessary.
When the auditor concludes that an illegal act has or is likely to have occurred, (s)he should discuss the matter with the appropriate level of management and request that any necessary remedial actions be taken. If the alleged illegal act has a material effect on the financial statements, or the client does not take the remedial action that the auditor considers necessary, the auditor should express a qualified or adverse opinion, depending on the level of materiality, or withdraw from the engagement.
An entity should consider the cost of a control in relationship to the risk. Which of the following controls best reflects this philosophy for a large dollar investment in heavy machine tools?
Imprinting a controlled identification number on each tool.
A controlled identification number on each tool and periodic checking allow for an effective control at reasonable cost.
Buldger Retailing, Inc., has an internal auditing staff of four full-time auditors. The auditor has determined that the internal auditors are competent and objective. The auditor may share which of the following responsibilities with Buldger’s internal auditors?
Performing substantive procedures.
An internal auditor may provide direct assistance to the auditor in completing some aspect of the audit work, for example, understanding internal control or performing tests of controls or substantive procedures. However, the reporting responsibility rests solely on the auditor. Thus, judgments about (1) assessments of the risks of material misstatement, (2) the materiality of misstatements, (3) the sufficiency of tests, (4) the evaluation of significant accounting estimates, and (5) other matters affecting the report should be made by the auditor.
Which of the following factors is most relevant when an auditor considers the client’s organizational structure in the context of the risks of material misstatement?
The suitability of the client’s lines of reporting.
Lines of reporting can determine the ability of management or other employees to circumvent implemented controls. Reporting lines are part of the organizational structure and affect the auditor’s assessment of the RMMs.
