2.6.19 Flashcards
The Committee of Sponsoring Organizations (COSO) of the Treadway Commission issued a document in 1992 that has been embraced by numerous organizations, including the AICPA and the GAO. That document is titled
Internal control–Integrated Framework.
Many professional and regulatory bodies, including the PCAOB, have recognized the COSO’s internal control framework by incorporating its terms, definitions, and concepts into their policies, procedures, pronouncements, and other literature.
In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning relevant assertions about
Existence:
Classification & Understandability:
Yes
No
Assertions about existence address whether assets or liabilities of the entity exist at a particular date. Assertions about classification and understandability concern whether financial statement components are appropriately presented, described, and disclosed (AU-C 315). Thus, inspection by the auditor provides direct evidence that new plant and equipment assets exist but is irrelevant to the classification and understandability assertions. Reading the financial statements and related notes provides evidence about these assertions.
If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year end?
Test of details for the entire year under audit.
Substantive procedures may be performed at an interim date. The auditor then should cover the remaining period by performing substantive procedures combined with tests of controls to provide a reasonable basis for extending conclusions. (But the auditor may determine that performing only substantive procedures suffices.) If unexpected misstatements are detected at the interim date, the auditor may conclude that the planned substantive procedures for the remaining period need to be modified. Modification may include extending or repeating at period end the procedures performed at the interim date. Accordingly, if no misstatements (exceptions) for an account are identified at the interim date, the auditor does not perform substantive procedures (tests of details) on the account at period end for the entire year under audit. Thus, the auditor does not repeat procedures performed at the interim date.
When auditing payroll transactions, an auditor is primarily concerned with the possibility of
Overpayments & unauthorized payments.
The auditor is primarily concerned about the possibility of errors in the amount of payment when auditing payroll transactions. Employee compensation is a major item of expense and is especially susceptible to fraud unless strong internal controls are present. The inherent risk for payroll transactions is increased by the need for rapid processing of the great mass of data generated in performing the payroll function.
Based on past experience with a client, an auditor determined performance materiality for fixed assets should be calculated at 1/4 of total materiality (5% of total gross fixed assets). Calculate performance materiality based on the following:
Fixed assets (gross) at 1/1/2017: $1,000,000
Capital expenditures: 250,000
Dispositions: 200,000
Accumulated depreciation at 1/1/2017: 400,000
Accumulated depreciation at 12/31/2017: 370,000
$13,125.
Materiality is a matter of professional judgment about whether misstatements could reasonably influence the economic decisions of users as a group, given their common informational needs. Performance materiality is the amount(s) set by the auditor at less than the materiality for (1) the statements as a whole or (2) particular classes of transactions, balances, or disclosures. Performance materiality is an adjustment to reduce to an appropriately low level the probability that the sum of (1) uncorrected and (2) undetected misstatements (whether or not individually material) exceeds the applicable materiality.
$13,125 = [$1,000,000 (fixed assets (gross) at 1/1/2017) + $250,000 (capital expenditures) – $200,000 (dispositions)] × [5% (total materiality %) × 1/4 (performance materiality)].
Mailing disbursement checks and remittance advices should be controlled by the employee who
Signs the check last.
Checks for disbursements should be signed by a responsible person in the cash disbursements department after necessary supporting evidence has been examined. This individual also should be responsible for mailing the signed checks and remittance advices.
To establish the existence and rights of an investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or
Confirms the number of shares owned that are held by an independent custodian.
To test the existence and rights and obligations (ownership) assertions, the auditor may (1) inspect the securities; (2) read partnership or similar agreements; (3) confirm the number of shares with the issuer, custodian, or counterparty; (4) trace dividend or interest revenue; and (5) confirm unsettled transactions by the broker-dealer. An independent custodian provides the greatest security for assets because of the segregation of responsibilities. External confirmation also provides reliable evidence that the stock exists and that the client has rights to it. Evidence from external, independent sources provides greater assurance than that secured solely within the entity.
When auditing a client’s statement of cash flows, an auditor will rely primarily upon
Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.
The statement of cash flows represents balances taken from the other statements as well as analysis of changes in those balances. Consequently, this statement is audited in conjunction with the balance sheet and income statement accounts.
The best audit procedure for determining the existence of open commodity futures contracts at year end is the review of
Direct confirmations with the client’s commodity traders.
Direct external confirmation by the client’s commodity traders provides independent verification of open commodity futures contracts and may reveal undisclosed liabilities.
Management may already know of the existence of significant deficiencies or material weaknesses in internal control. Which of the following is a true statement about the auditor’s communication in this situation?
The auditor should communicate these control conditions in writing regardless of a decision by management and those charged with governance not to remedy them.
The auditor’s responsibility is to communicate in writing significant deficiencies and material weaknesses regardless of a decision by management and those charged with governance not to remedy them because of cost-benefit considerations or other factors. These should be communicated to management and those charged with governance each period within 60 days after the report release date (AU-C 265).
The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of
Transactions.
The audit of the income statement focuses on the propriety of handling transactions because most income statement accounts represent large volumes of transactions. The audit of the balance sheet concentrates on verification of account balances.
When performing procedures for a physical inventory, an auditor cannot perform which of the following steps using a generalized audit software (GAS) package?
Observing inventory.
The primary use of GAS is to select and summarize a client’s records for additional testing. However, the physical observation of inventory, a required audit procedure under AU-C 501, can be done only by an auditor.
An auditor’s tests of controls for completeness of the revenue cycle usually include determining whether
An invoice is prepared for each shipping document.
Tests of completeness determine whether all assets, liabilities, and equity interests are recorded properly. They emphasize the events rather than the existence of the documents. When a shipping document does not have a matching invoice, the relevant revenue is not recorded. The invoice is used to prepare the necessary journal entries.
Which of the following could be difficult to determine because electronic evidence may not be retrievable after a specific period?
The timing of control and substantive tests.
The timing of control and substantive tests are, at least in part, determined based on the availability and retrievability of evidence over a period of time.
An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of
Classification and understandability.
Assertions about presentation and disclosure address whether particular components of the financial statements are properly classified, described, and disclosed. Determining that the pledge or assignment of inventories is appropriately disclosed is an audit objective related to the classification and understandability assertion.
