1.27.19 Flashcards
Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?
Activity logs that indicate failed transactions.
Because an audit trail allows for the tracing of a transaction from initiation to its disposition, an activity log provides a key link in the process. Such a log provides information about users who have accessed the system, the files accessed, the processing accomplished, the time of access, and the amount of time the processing required.
Inspections performed by the PCAOB focus on quality control of registered CPA firms that perform audits of public companies (issuers). As required by the Sarbanes-Oxley Act, inspections determine all of the following except that
Only staff with prior experience work on audits.
Staff members are required to be trained and supervised in accordance with auditing standards. However, there is no requirement that they have prior experience.
An auditor intends to use the work of an actuary. Under these circumstances, the auditor
Should assess the actuary’s competence and objectivity.
When deciding whether to use an auditor’s specialist, the auditor should evaluate whether the auditor’s specialist has the needed competence, capabilities, and objectivity. For an external specialist, the evaluation should include inquiries about threats to objectivity (AU-C 620). Consideration should be given to the specialist’s professional certification, license, or other recognition of competence and the specialist’s reputation and standing.
Which of the following matters would an auditor most likely consider to be a significant deficiency or material weakness to be communicated to those charged with governance?
Evidence of a lack of objectivity by those responsible for accounting decisions.
Failures in internal control include deficiencies in internal control design and failures in the operation of internal control. An example of the second type is evidence of undue bias or lack of objectivity by those responsible for accounting decisions (AU-C 265).
Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations?
Recipients are likely to sign other types of positive confirmations without careful investigation.
A positive confirmation request asks for a reply in all cases. It may ask the confirming parties to state whether they agree with the information given or to provide information. Positive confirmation requests obtain evidence only when responses are received. Blank confirmation requests are used to reduce the risk that recipients will respond without verifying the information. They omit the amount or other information to be confirmed and ask the confirming parties to fill in the information. The disadvantage is a lower response rate because of the additional effort required.
An auditor notes year-to-year increases of over $200,000 for small tool expense at a manufacturing facility that has produced the same amount of identical product for the last 3 years. Production inventory is kept in a controlled staging area adjacent to the receiving dock, but the supply of small tools is kept in an unsupervised area near the exit to the plant employees’ parking lot. After determining that all of the following alternatives are equal in cost and are also feasible for local management, the auditor can best address the security issue by recommending that plant management
Move the small tools inventory to the custody of the production inventory staging superintendent and implement the use of a special requisition to issue small tools.
Physical control of assets is a preventive control that reduces the likelihood of theft or other loss. Giving responsibility for custody of small tools to one individual establishes accountability. Requiring that requisitions be submitted ensures that tool use is properly authorized.
An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the least useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered?
Results of performing substantive procedures.
Substantive procedures are performed to detect material misstatements at the relevant assertion level. They include tests of details and substantive analytical procedures. They are performed after the auditor has obtained an understanding of the entity and its environment, including its internal control.
Which of the following in a predecessor’s audit documentation is the auditor least likely to be interested in reviewing?
Analysis of income statement accounts.
The predecessor auditor ordinarily should allow the auditor to review audit documentation of matters of continuing accounting and auditing significance, such as the schedule of uncorrected misstatements and analyses of balance sheet accounts and contingencies. The auditor should obtain sufficient appropriate evidence about whether (1) the opening balances of the current-year statements are materially misstated and (2) accounting policies are consistently applied (or changes are appropriate) (AU-C 510). However, analyses of income statement accounts have less significance for an initial audit because they have no beginning balances.
Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?
Comparing current-year balances to budgeted balances.
The auditor performs analytical procedures during the planning stage of an audit. Analytical procedures are evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data using models. These procedures include the auditor comparing current-year balances to budgeted balances.
Which of the following controls would an entity most likely use in safeguarding against the loss of trading securities?
An independent trust company that has no direct contact with the employees who have record-keeping responsibilities has possession of the securities.
Assigning custody of trading securities to a bank or trust company provides the greatest security because such an institution normally has strict controls over assets entrusted to it and access to its vaults.
A primary objective of analytical procedures used to form an overall conclusion is to
Determine whether the financial statements are consistent with the auditor’s understanding.
Analytical procedures should be applied to form an overall conclusion near the end of the audit. They may include reading the statements and considering (1) the adequacy of evidence regarding previously identified unusual or unexpected balances and (2) unusual or unexpected balances or relationships not previously noted.
After obtaining an understanding of internal control for the audit of a nonissuer’s financial statements, an auditor decided not to perform tests of controls. The auditor most likely decided that
Performing only substantive procedures would effectively reduce audit risk to an acceptably low level.
The assessment of risks is a basis for choosing the audit approach. A substantive audit approach is based only on substantive procedures. A combined audit approach applies tests of controls and substantive procedures. For example, the risk assessment procedures may not identify effective controls for the relevant assertion, or testing controls may be inefficient, e.g., because client documentation is not available. The result is that controls are not a factor in the risk assessment. In these cases, if the auditor adopts the substantive audit approach, (s)he needs to be satisfied that it will be effective in reducing audit risk to an acceptable level. For example, the substantive audit approach may not be feasible when the processing of routine transactions is highly automated with little manual intervention. In this case, the combined audit approach is chosen.
Which of the following statements about the assessment of the risks of material misstatement in a client’s computer environment is true?
The auditor’s objectives with respect to the assessment of the risks of material misstatement are the same as in a manual system.
The auditor is required to perform risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control, to identify and assess the RMMs and to design further audit procedures. Whether the control system is manual or computerized does not affect this objective.
Which of the following events most likely would indicate the existence of related party transactions?
Selling real estate at a price that differs significantly from its appraised value.
Related party transactions may not be conducted in accordance with customary business practices. For example, in an arm’s-length transaction, real estate with an appraised value usually is sold at approximately that value. A material disparity in the consideration exchanged may indicate that the parties are related.
Under which of the following circumstances would an auditor be considered to be using the work of a specialist?
The auditor engages a lawyer to interpret the provisions of a complex contract.
An auditor’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The work in that field is used to assist the auditor in obtaining sufficient appropriate audit evidence.
