1.15.18 Flashcards
Which of the following most completely describes how independence has been defined by the accounting profession?
Possessing the ability to act with integrity and objectivity.
Integrity, objectivity, and independence are overlapping concepts. Integrity requires honesty and candor within the limits of confidentiality. It also requires, among other things, observation of the Principle of objectivity and independence. Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Independence precludes relationships that “may appear to impair objectivity in rendering attestation services.” Thus, in rendering services, a member in public practice should be independent in appearance as well as in fact.
An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? Select and examine
Canceled checks and ascertain that the related receiving reports are dated no later than the checks.
The best procedure is to test whether any checks have been issued without receiving reports. An appropriate sample of canceled checks and the related supporting documentation should be examined. The checks should not have been written before the dates on the receiving reports.
One purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to
Provide reasonable assurance that the integrity of the client is considered.
CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm’s policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with applicable requirements (QC 10).
Based on observations made during an audit, the auditor should discuss with management the effectiveness of the company’s controls that protect against the purchase of
Supplies individually ordered, without considering possible volume discounts.
An auditor should communicate to management and those charged with governance significant deficiencies and material weaknesses observed during an audit (AU-C 265). (S)he should discuss procedures that permit the avoidable loss of assets. Thus, an auditor should determine whether the failure to consider possible volume discounts is due to fraud or error.
Which of the following information discovered during an audit most likely would raise a question concerning possible noncompliance with laws and regulations?
The entity prepared several large checks payable to cash during the year.
Some examples of information raising questions about possible noncompliance with laws and regulations are unauthorized or improperly recorded transactions, a governmental investigation, violations reported by regulators, large payments for unspecified services to consultants, excessive commissions or fees, unusual cash payments or checks payable to cash, unexplained payments to government officials or employees, and failure to file tax returns or pay governmental duties or similar fees.
As an in-charge auditor, you are reviewing a communication about significant deficiencies and material weaknesses related to internal control over cash receipts and disbursements. Which of the following conditions, standing alone, should cause you the least concern?
Checks are signed by only one person.
The auditor should be least concerned that the checks are signed by only one person if that person is not assigned other incompatible functions, and proper documentation is required before signing.
Which of the following statements is correct concerning internal control in an electronic data interchange (EDI) system?
Preventive controls generally are more important than detective controls in EDI systems.
In general, preventive controls are more important than detective controls because the benefits typically outweigh the costs. In electronic processing, once a transaction is accepted, the opportunity to apply detective controls is often limited. Thus, preventing fraud or error is important.
For effective internal control, which of the following functions should not be the responsibility of the CFO’s department?
Data processing.
The CFO (chief financial officer) performs the custodianship function. For a proper segregation of functions, the CFO should not perform a recording function such as data processing.
Which of the following internal control activities is not usually performed in the CFO’s department?
Approving vendors’ invoices for payment.
The accounts payable department is responsible for compiling documentation to support an account payable. This approval process is performed in the accounting department.
An auditor would be most likely to consider modifying an otherwise unmodified opinion if the client’s financial statements include a note on related party transactions
Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties.
It is most often not possible to determine whether a particular transaction would have occurred if the parties had not been related or what the terms and manner of settlement would have been. Accordingly, assertions about such matters are difficult to substantiate. The auditor may (1) believe that the assertion is unsubstantiated or (2) not be able to obtain sufficient appropriate evidence. In these cases, the auditor considers the implications for the audit, including whether to modify the opinion (AU-C 550 and AS 2410). (S)he should consider including in the report a comment to that effect and expressing a qualified or adverse opinion.
Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriations of assets?
A large number of bearer bonds on hand.
Large purchases of bank checks or bonds payable to bearer are often an indication of illegal or suspicious activity. Bearer instruments are negotiable by delivery alone, that is, without a signature. They are equivalent to cash. Thus, the holder has anonymity. They can be used to evade taxes or conceal business transactions.
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be shipped that are not invoiced. The inadequate controls could cause an
Understatement of revenues and receivables and an overstatement of inventory.
If goods are shipped before the sales are invoiced, inventory will not be credited for the shipments, thus overstating inventory. Moreover, if the accounting function does not receive copies of the invoices, sales and receivables will not be recorded, with the consequent understatement of those accounts.
An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that depicts the auditor’s
Understanding of the system.
The auditor should document (1) the understanding of the entity and its environment and the components of internal control, (2) the sources of information regarding the understanding, and (3) the risk assessment procedures performed. The form and extent of this documentation are influenced by the nature and complexity of the entity’s controls (AU-C 315). For example, documentation of the understanding of internal control of a complex information system in which many transactions are electronically initiated, authorized, recorded, processed, or reported may include questionnaires, flowcharts, or decision tables.
North Co., a nonissuer, asked its tax accountant, King, a CPA in public practice, to generate North’s interim financial statements on King’s personal computer when King prepared North’s quarterly tax return. King should not prepare these financial statements unless, as a minimum, King complies with the provisions of
Statements on Standards for Accounting and Review Services.
The Statements on Standards for Accounting and Review Services apply to preparations, compilations, and reviews performed by practitioners. The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer.
The concept of materiality is least important to an auditor when considering the
Effects of a direct financial interest in the client on the CPA’s independence.
Independence is impaired if a CPA has any direct financial interest in a client. Whether this direct financial interest is material is irrelevant. The test of materiality is applied, however, if the financial interest is indirect.
