1.26.19 Flashcards
An auditor is obtaining an understanding of a client’s Internet controls. Which of the following is most likely the least effective control?
The client requires users to share potentially useful downloaded programs from public electronic sources with only authorized employees.
Sharing programs from public electronic sources with authorized employees is an ineffective control. The programs are available to anyone with access to the public electronic sources.
Which of the following internal control activities most likely addresses the completeness assertion for inventory?
Receiving reports are prenumbered and periodically reconciled.
The completeness assertion states that all transactions and accounts that should be presented are included. For inventory, the assertion is that inventory quantities include all products, materials, and supplies on hand or that are owned by the entity but are in transit or stored elsewhere. The use of prenumbered receiving reports makes it possible to detect unrecorded (incomplete) inventory.
In a payroll computer system, data from what file is matched periodically with wage rate and other information to calculate payroll?
Payroll master
Periodically (e.g., weekly), information from the payroll master file is matched with wage rate, deduction, and exemption information to calculate the payroll. The checks are printed (or deposits are sent to employees’ banks), and the general ledger is updated.
When an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except
Whether there has been any turnover of the component’s board members.
When the auditor of a parent entity is also the auditor of a component, the factors that may influence the decision whether to obtain a separate audit engagement letter from the component include (1) who engages the component auditor, (2) whether a separate auditor’s report is to be issued on the component, (3) legal requirements regarding the appointment of the auditor, (4) degree of ownership by the parent, and (5) degree of independence of the component’s management from the parent entity.
According to PCAOB standards, each of the following items of information should be included in the documentation of an engagement quality review, except
An assessment by the engagement quality reviewer of the instances of fraud identified by the audit team.
The engagement quality reviewer should evaluate (1) the engagement team’s assessment of, and audit responses to, significant risks identified, including fraud risks, and (2) other significant risks identified by the engagement quality reviewer through procedures required by AS 1220, Engagement Quality Review. Thus, the engagement quality reviewer does not independently assess fraud identified by the engagement team.
Which of the following statements most likely represents a disadvantage for an entity that keeps digital computer files rather than manually prepared files?
It is usually easier for unauthorized persons to access and alter the files.
In a manual system, one individual is assigned responsibility for maintaining and safeguarding the records. However, in a computer environment, the data files may be subject to change by others without documentation or indication of who made the changes.
An auditor’s preliminary analysis of accounts receivable turnover revealed the following rates over these accounting periods:
Year 3: 4.3
Year 2: 6.2
Year 1: 7.3
Which of the following is the most likely cause of the decrease in accounts receivable turnover?
Liberalization of credit policy.
The accounts receivable turnover ratio equals net credit sales over average accounts receivable. Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increase. Liberalization of credit policy will increase receivables.
The scope and nature of an auditor’s contractual obligation to a client is ordinarily set forth in the
Engagement letter.
The terms of the engagement should be documented in an engagement letter that states the (1) objective and scope of the audit, (2) responsibilities of the auditor and management, (3) inherent limitations of the audit and internal control, (4) applicable financial reporting framework, and (5) expected form and content of audit reports. An engagement letter should be sent by the CPA to the prospective client on each engagement, audit or otherwise.
Which of the following presumptions is correct about the reliability of audit evidence?
Effective internal control provides more assurance about the reliability of audit evidence.
The more effective the internal control, the more reliable the evidence generated internally by the entity, e.g., the accounting records and financial statements.
A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about
Suspense debits that management believes will benefit future operations.
Although the auditor must evaluate relevant assertions about all accounts, the greatest risks are overstated assets and understated liabilities. The unverified suspense debits represent assets that may not exist.
Which of the following statements about audit evidence is true?
The sufficiency and appropriateness of audit evidence is a matter of professional judgment.
The auditor exercises professional judgment when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level. Sufficiency measures the quantity of audit evidence. Appropriateness measures its quality (relevance and reliability). To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.
Which of the following matters is an auditor not required to communicate to an entity’s audit committee?
The degree of reliance the auditor placed on the management representation letter.
Management representations are audit evidence but do not substitute for necessary auditing procedures. The auditor should use professional judgment in determining the reliability of management representations. However, (s)he need not communicate this judgment to those charged with governance.
Fact Pattern: Sales procedures that were encountered during the regular annual audit of Marvel Wholesale Distributing Company are described below.
Customer orders are received by the sales-order department. A clerk computes the dollar amount of the order and sends it to the credit department for approval. Credit approval is stamped on the order and returned to the sales-order department. An invoice is prepared in two copies, and the order is filed in the customer order file. The customer copy of the invoice is sent to the billing department and held in the pending file, awaiting notification that the order has been shipped. The shipping copy of the invoice is routed through the warehouse, and the shipping department has authority for the respective departments to release and ship the merchandise. Shipping department personnel pack the order and prepare a three-copy bill of lading: The original copy is mailed to the customer, the second copy is sent with the shipment, and the other is filed in sequence in the bill of lading file. The invoice shipping copy is sent to the billing department. The billing clerk matches the received shipping copy with the customer copy from the pending file. Both copies of the invoice are priced, extended, and footed. The customer copy is then mailed directly to the customer, and the shipping copy is sent to the accounts receivable clerk. The accounts receivable clerk enters the invoice data in a sales-accounts receivable journal, posts the customer’s account in the subsidiary customers’ accounts ledger, and files the shipping copy in the sales invoice file. The invoices are numbered and filed in sequence.
To gather audit evidence concerning the proper credit approval of sales at the Marvel Company, the auditor would select a sample of transaction documents from the population represented by the
Customer order file.
The customer order is first sent to the credit department and credit approval is stamped on it. It is then returned to the sales department and filed. The customer order file thus contains the only documentation for credit approvals.
Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor’s conclusions?
Professional judgement.
The auditor’s professional judgment must determine the necessary audit plans and the specific audit procedures that will gather sufficient appropriate evidence to reduce audit risk to an acceptably low level and enable the auditor to draw reasonable conclusions on which to base the opinion.
In confirming a client’s accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year’s audit, the auditor most likely would choose
Individual invoices.
When external confirmation of the balances of accounts receivable is difficult, confirming individual transactions represented by individual invoices is likely to be preferable. The invoices should not be difficult to reconcile with confirmed amounts.
