2.14.19 Flashcards
An auditor decides to express a qualified opinion on an entity’s financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor’s report should state that the qualification pertains to
The possible effects on the financial statements.
When an auditor qualifies his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
“There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements.” The foregoing passage is most likely from a
Management representation letter.
The auditor is required to obtain written representations from management and, possibly, those charged with governance. They should be in the form of a representation letter addressed to the auditor. The letter should state that all known or suspected noncompliance with laws and regulations that should be considered when preparing financial statements has been disclosed (AU-C 580).
Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about the relevant assertion regarding
Cutoff.
The cutoff assertion is that transactions and events have been recorded in the proper period. To determine that all goods for which title has passed to the client at year end are recorded in inventory and accounts payable, a purchases cutoff test is appropriate.
Which of the following questions would not be appropriate for an internal control questionnaire concerning inventory?
Is the storeroom located in close proximity to the shipping department?
Location of the storeroom is not a control issue for the auditor.
The auditor observes client employees while obtaining an understanding of internal control to
Obtain knowledge of the design and implementation of relevant controls.
To obtain the understanding of relevant controls, the auditor evaluates their design and determines whether they have been implemented. These procedures include observation of the application of specific controls, tracing transactions, inspection of documents and reports, and inquiries of appropriate client personnel. But inquiry alone is insufficient (AU-C 315). Certain organizational controls (e.g., segregation of functional responsibilities) do not leave an audit trail, which may require auditor observation of client personnel.
An auditor’s analytical procedures most likely would be facilitated if the entity
Uses a standard cost system that produces variance reports.
A comparison of anticipated results, such as budgets or forecasts prepared by management, with actual results is an analytical procedure. Thus, the use of standard costs and variance analysis facilitates the application of analytical procedures.
A closely held manufacturing company must disclose all of the following information in audited financial statements except
Replacement cost of inventory.
A U.S. manufacturer should report inventory at full absorption cost unless the fair value is less than cost. Neither closely nor publicly held companies must report replacement cost of inventory.
Which of the following items is an example of an inherent limitation in an internal control system?
Human error in decision making.
Because of its inherent limitations, internal control can be designed and operated to provide only reasonable assurance that the entity’s objectives are met. Thus, (1) human judgment is faulty, (2) controls may fail because of human error, (3) manual or automated controls can be circumvented by collusion, and (4) management may inappropriately override internal control. Moreover, custom, culture, the corporate governance system, and an effective control environment are not absolute deterrents to fraud. For example, if the nature of management incentives increases the RMMs, the effectiveness of controls may be reduced. A factor that is an inherent limitation of an audit as well as internal control is the need to balance benefit and cost. Although the ability to provide only reasonable assurance is a primary design criterion for internal control, the precise measurement of costs and benefits is not feasible. However, costs should not exceed the benefits of control. Thus, the cost constraint limits internal control.
Which of the following is the most important consideration of an auditor when examining the shareholders’ equity section of a client’s balance sheet?
Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors’ meetings.
A primary concern of the auditor is that all capital stock transactions are properly authorized. Accordingly, all entries in the capital stock account should be traced to the minutes of the board of directors’ meetings. The articles of incorporation, by-laws, and minutes of shareholders’ meetings should also be reviewed. The auditor requires information about the number and rights of shares authorized and issued, the par or stated value, conversion and call features, stock dividends, and stock splits. The auditor also determines whether transactions are properly accounted for and shareholders’ equity items are presented in accordance with the applicable financial reporting framework.
An auditor expresses an adverse opinion if
A misstatement is material and pervasive.
When the effects on the financial statements of a material misstatement are pervasive, the auditor expresses an adverse opinion. Pervasive effects are not confined to specific elements, accounts, or items of the financial statements. If they are confined, they represent a substantial proportion of the statements.`
An auditor is testing a multinational corporation’s fixed asset purchases for overstatement and notices that, out of the hundreds of purchases, a significant number of large purchases were made during the year. The auditor decides to use monetary-unit sampling (MUS) to test fixed asset purchases. Which of the following would not be an advantage of using MUS in this situation?
MUS eliminates the need for auditor’s judgment.
Statistical sampling, such as MUS, allows the auditor to obtain an objective sample from an existing population. However, this method of sampling does not eliminate the need for the auditor’s judgment in evaluating the sample.
What is an auditor’s evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?
Modify the assessed risk of material misstatement because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.
The sample has a 6% (3 ÷ 50) deviation rate. The auditor’s achieved upper deviation limit is 8% (6% + the 2% allowance for sampling risk). The allowance for sampling risk may be calculated from a standard table as the difference between the upper deviation limit and the sample rate. However, the allowance is given. Thus, the true deviation rate could be as large as 8% and exceed the tolerable rate. Accordingly, the auditor should revise the assessed risk of material misstatement for the relevant assertions and possibly alter the nature, timing, and extent of substantive procedures.
An auditor is selecting vouchers for testing an entity’s internal controls related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily is replaced by another voucher in the random sample if the voided voucher
Has been properly voided.
A properly voided voucher ordinarily should not be subject to applicable controls. Thus, it is not included in a sample for a test of controls because it is not a sampling unit (an item in the population tested).
Effective control over the cash payroll function would mandate which of the following?
Each employee should be asked to sign a receipt.
Under a cash payroll system, the receipt signed by the employee is the only document in support of payment. The signed receipt is essential to verify proper payment.
Which of the following audit techniques most likely will provide an auditor with the most assurance about the effectiveness of the operation of a control?
Observation of client personnel.
Evidence about the effectiveness of the operation of a control obtained directly, such as by observation of client personnel, is more reliable than evidence obtained indirectly, such as through inquiry. Thus, evidence obtained by the auditor’s own observation of a client employee’s application of a control most likely provides greater assurance than an inquiry about the application of the control. Moreover, mere inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control.
