1.19.18 Flashcards
Which of the following legal situations would be considered to impair the auditor’s independence?
Actual litigation by the auditor against the current management alleging management fraud or deceit.
The following are situations in which actual or threatened litigation impairs independence: (1) litigation has begun alleging deficient audit work; (2) litigation has begun alleging fraud or deceit by current management; and (3) management has expressed an intention to commence litigation alleging deficient audit work, and the auditor concludes that it is probable that such a claim will be filed.
A customer intended to order 100 units of product Z96014 but incorrectly ordered nonexistent product Z96015. Which of the following controls most likely would detect this error?
Check digit verification.
Check digit verification is used to identify incorrect identification numbers. The digit is generated by applying an algorithm to the ID number. During input, the check digit is recomputed by applying the same algorithm to the entered ID number.
A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by
Having an appropriate system of quality control.
A system of quality control should provide reasonable assurance that the firm’s personnel comply with professional standards and applicable regulatory and legal requirements. However, deficiencies in individual engagements covered by the quality control standards do not, by themselves, signify that the firm’s system of quality control is insufficient to provide it with reasonable assurance of compliance with the relevant standards. GAAS apply to individual audit engagements. Quality control standards apply to the firm’s practice as a whole.
Which of the following questions is inappropriate on an internal control questionnaire concerning purchase transactions?
Are intact cash receipts deposited daily in the bank?
The question about the daily deposit of intact cash receipts is related to the cash receipts cycle, not the purchases-payables-cash disbursements cycle.
Management discovers that a supervisor at one of its restaurant locations removes excess cash and resets sales totals throughout the day on the point-of-sale (POS) system. At closing, the supervisor deposits cash equal to the recorded sales on the POS system and keeps the rest.
The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank deposit slip to the company’s revenue accounting department. The revenue accounting department records the sales and the cash for the location in the general ledger and verifies the deposit slip to the bank statement. Any differences between sales and deposits are recorded in an over/short account and, if necessary, followed up with the location supervisor. The customer food order checks are serially numbered, and it is the supervisor’s responsibility to see that they are accounted for at the end of each day. Customer checks and the transaction journal tapes from the POS system are kept by the supervisor for 1 week at the location and then destroyed.
Which of the following audit procedures would have detected the fraud?
For selected days, reconciling the total of customer food checks to daily bank deposits.
Using the total of the customer food checks as a confirmation of sales would have detected the shortage in the bank deposit.
Which of the following is a step in an auditor’s decision to rely on internal controls?
Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls.
An auditor should obtain an understanding of controls relevant to the audit. Thus, the auditor should evaluate their design and determine whether they have been implemented. The evaluation of design considers whether the controls can effectively prevent, or detect and correct, material misstatements (AU-C 315 and AS 2110). The auditor then tests relevant controls to obtain sufficient appropriate evidence about their operating effectiveness if (1) the auditor intends to rely on them in determining the nature, timing, and extent of substantive procedures, or (2) substantive procedures alone cannot provide sufficient appropriate evidence at the relevant assertion level (AU-C 330 and AS 2301).
Which of the following situations represents an internal control weakness in the payroll department?
Paychecks are distributed by the employees’ immediate supervisors.
A supervisor who distributes payroll checks can divert paychecks of fictitious employees if (s)he also has access to personnel records. This opportunity results from being assigned the incompatible functions of authorization, recordkeeping, and custodianship. A person unrelated to either payroll recordkeeping or the operating department should distribute checks. Many organizations use direct deposit programs to transfer pay directly to employees’ bank accounts, eliminating the distribution process.
The auditor should perform tests of controls when the auditor’s risk assessment includes an expectation
Of the operating effectiveness of internal control.
The purpose of tests of controls is to evaluate the effectiveness of controls in preventing, or detecting and correcting, material misstatements. When the auditor intends to rely on the controls, tests of their effectiveness should be performed.
Smith, CPA, is a partner of Johnson Accounting Firm. Johnson audited the books of Hometown Bank. Smith’s independence would be impaired under which of the following circumstances?
Smith is a director of Hometown Bank.
Independence is impaired if a firm or one of its partners is associated with the client as an officer, director, manager, employee, etc.
Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at the financial statement level is an example of
An overall response.
Overall responses apply to the assessed RMMs at the financial statement level. The following are examples of overall responses: (1) An emphasis on professional skepticism in evidence gathering and evaluation; (2) increased supervision; (3) assignment of staff with greater experience or expertise; (4) greater unpredictability in the choice of further audit procedures; and (5) changing the nature, timing, and extent of audit procedures, such as modifying the nature of a procedure to obtain more persuasive evidence (AU-C 330).
In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the
Quality of the internal auditors’ working paper documentation.
In assessing the competence of an internal auditor, the CPA should consider such factors as (1) educational level and professional experience; (2) professional certification and continuing education; (3) audit policies, programs, and procedures; (4) departmental practices regarding assignments; (5) quality of working paper documentation, reports, and recommendations; and (6) evaluation of the internal auditor’s performance.
The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that
Material misstatements that occur will not be detected by the audit.
Audit risk is a function of the risks of material misstatement and detection risk. Detection risk is the risk that the procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material individually or combined with other misstatements. The auditor assesses the risk of material misstatement after obtaining an understanding of the entity and its environment, including its internal control. It exists at the overall financial statement level and assertion level. The RMM at the assertion level consists of inherent risk and control risk. Some auditors use a mathematical model based on the relationships of the components of audit risk to arrive at an acceptable level of detection risk. For example, it reflects that the acceptable detection risk has an inverse relationship with the RMMs at the assertion level (AU-C 200 and AS 1101).
When an auditor tests the internal controls of a computerized system, which of the following is true of the test data approach?
Test data are processed with the client’s computer and the results are compared to the auditor’s predetermined results.
The test data are processed by the client’s computer programs under the control of the auditor. These results are then compared to the auditor’s expectations.
According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances?
The auditor’s checking account, which is fully insured by a federal agency, is held at a client financial institution.
The independence of a member or a member’s firm is not impaired if the member’s depository relationship (checking, savings, certificates of deposit, money market accounts) is fully insured by a state or federal deposit insurance agency. Moreover, uninsured amounts do not impair independence if they are immaterial.
Which of the following is correct regarding the communication between successor and predecessor auditors?
The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor.
The auditor should communicate with the predecessor auditor before final acceptance of the engagement. The predecessor is expected to respond promptly and, absent unusual circumstances, fully.The auditor is responsible for initiating the communication. The Code of Professional Conduct protects the confidentiality of client information. Thus, the auditor and the predecessor auditor should obtain client permission to have discussions about the integrity of management as well as pertinent audit-related issues.
