A2

Question 1

Who is responsible for ensuring compliance with applicable laws?

Answer 1

the client (NOT auditor)

Question 2

T/F: To be considered a predecessor auditor, you would have needed to complete an audit of the F/S.

Answer 2

false - you would have needed to have been engaged with the client at least but wouldn’t have needed to complete the audit (this is rare)

Question 3

T/F: If you do a review, you must state in the report that it’s substantially less in scope than an audit.

Answer 3

true

Question 4

T/F: When audit procedures are performed before year-end, the auditor must assess the incremental audit risk involved and determine whether sufficient alternative procedures exist to extend the interim conclusions to year-end.

Answer 4

true

Question 5

A decrease in the amount of misstatements that the auditor can tolerate will cause the auditor to _____

Answer 5

perform the planned auditing procedures closer to the B/S date

note: this means that because they now tolerate fewer misstatements (more intense), they need the F/S to be more accurate and reliable, so the auditors will perform more tests closer to year-end

Question 6

T/F: The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA.

Answer 6

true - the CPA is only concerned with material areas

Question 7

What effects does the work of the internal auditor have on the audit team?

Answer 7

-procedures performed in obtaining an understanding of internal control
-procedures performed in assessing the risk of material misstatement
-substantive procedures performed in gathering direct evidence

Question 8

T/F: A lawyer is considered a specialist if they’re employed to provide guidance on a complex contract (not litigation).

Answer 8

true

Question 9

The appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the ________.

Answer 9

specialist

Question 10

The _______ is responsible for obtaining an understanding of the methods or assumptions to determine if the findings are suitable as evidence.

Answer 10

auditor

Question 11

When would it be appropriate for the auditor to refer to the work of a specialist in the audit report?

Answer 11

1. when there is a difference between the client’s and specialist’s valuation of an asset
2. when the auditor wants to add an explanatory paragraph for a modified report to emphasize a particular matter

Question 12

Reminder: you need to annualize materiality if they only give you numbers as of 6/30 !

Answer 12

noted

Question 13

An understanding of internal control relevant to an entity’s ___________ is necessary as part of audit planning.

Answer 13

financial reporting objective

(NOT business functions)

Question 14

What do analytical procedures help with?

Answer 14

-risk of material misstatement due to fraud
-unusual transactions
-new transactions (at a high level)

Question 15

What are an entity’s objectives?

Answer 15

1. reliable financial reporting
2. effective and efficient operations
3. compliance

Question 16

What is the idea behind “substance over form”?

Answer 16

Management may establish appropriate procedures but not enforce compliance with them. There could be controls that may appear to exist but are actually not operating effectively.

Question 17

Establishing and maintaining internal control is the responsibility of _______.

Answer 17

management (not internal auditors)

Question 18

What is a primary criterion to consider when designing internal control?

Answer 18

cost-benefit relationship of controls

Question 19

T/F: An auditor evaluates an entity’s risk assessment to understand how management addresses risks relevant to financial reporting.

Answer 19

true

(not b/c it’s a component of overall audit risk in an audit)

Question 20

Why does an auditor care about information systems?

Answer 20

to understand:
1. the types of transactions processed
2. how transactions are initiated, recorded, and summarized
3. the process to prepare the F/S
4. how an entity communicates financial reporting roles to its staff

Question 21

What does monitoring include?

Answer 21

1. assessing info derived from external parties
2. assessing the quality of internal control performance over time
3. improving controls (not eliminating them) that are not operating effectively

Question 22

What are some of the best monitoring activities for managers to use?

Answer 22

1. budgets and forecasts to identify variances from expectations
2. monthly reconciliations of all bank accounts

Question 23

T/F: Risk assessment procedures are needed to evaluate the design of relevant controls.

Answer 23

true

Question 24

What is the textbook definition of a walkthrough?

Answer 24

following a transaction from its origination until it is reflected in the F/S

Question 25

What are common inherent limitations of internal control (meaning you can’t avoid them)?

Answer 25

1. human error
2. collusion
3. faulty decision-making by employees
4. management override

Question 26

T/F: If transactions are authorized by the client within services performed by another entity, this process would not be considered to be part of the client’s information system.

Answer 26

true

Question 27

T/F: Continuous performance of audit tests is required when financial data is processed electronically without provision of paper documentation.

Answer 27

true - this is to ensure that controls are operating effectively throughout the period

Question 28

In computer audit applications, what do efficient and effective system usage require?

Answer 28

1. identification of the appropriate audit tasks
2. appropriate software to perform the selected audit tasks

Question 29

What does an integrated test facility do?

Answer 29

runs test transactions through the “live” system and posts to simulated (dummy) files to provide an auditor with information about the operating effectiveness of controls

real and fake transactions are processed together without the client being aware of the testing process

Question 30

What are embedded audit modules?

Answer 30

sections of the application program code that collect transaction data for the auditor; they are usually built into the application program when the program is developed

you can capture specific data as the transactions are being processed

this requires the auditors to be involved in the system design of the application to be monitored

Question 31

What is the test data approach?

Answer 31

a technique in which the client’s application program is used to process a set of test data - the results are already known by the auditor

if the client’s program is operating effectively, it should generate the same results determined by the auditor

test data does not need to consist of all possible valid and invalid conditions

only one transaction of each type needs to be tested

you’re not going to be worried about authorization here

Question 32

What is a parallel simulation?

Answer 32

the client’s input data is processed through both the auditor’s version of the client program and the client’s program; the output is compared

the auditor reprocesses the client’s data using the auditor’s own software (you compare your results to those of the client)

an advantage: the size of the sample can be greatly expanded at relatively little additional cost

Question 33

What does generalized audit software do?

Answer 33

selects items meeting specified criteria

note: you cannot reduce the need to perform tests of controls if reliance on controls is planned

Question 34

What is one of the primary benefits of generalized audit software?

Answer 34

the auditor can access information stored on computer files while having a limited understanding of the client’s hardware and software features

Question 35

T/F: It’s required for an auditor to determine if internal controls have been implemented for both private and public audits.

Answer 35

true

Question 36

Define materiality.

Answer 36

the smallest aggregate level of misstatement that could be considered material to any one of the financial statements (NOT as a whole)