Review Audit Topic 7-12

When reporting to the audit committee on conditions relating to an entity's internal control observed during an audit of a nonissuer's financial statements, the auditor should include a

Restriction on the use of the report.

An auditor would be least likely to use external confirmations in connection with the audit of

Refundable income taxes

Which of the following statements is an auditor most likely to add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipient?

"If you do not report any differences within 15 days, it will be assumed that this statement is correct."

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely will be included with the client's confirmation letter?

A client-prepared statement of account showing the details of the customer's account balance.

In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence?

A factor for an auditor to consider when designing confirmation requests is the assertion being tested.

In an integrated audit, an auditor should issue an adverse opinion on the effectiveness of an entity's internal control in which of the following situations?

A material weakness exists

Which of the following situations represents a limitation, rather than a failure, of internal control?

A purchasing employee and an outside vendor participate in a kickback scheme.

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A small number of accounts may be in dispute, and the accounts receivable balance arises from sales to many customers with small balances.

Which of the following is not a role of the risk assessment in an integrated audit of a nonissuer?

Concluding on the effectiveness of a given control.

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because

Customers may not be inclined to report understatement errors in their accounts.

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should an auditor take?

Accept the confirmation but verify the source and content through a telephone call to the respondent.

It is important for the auditor to consider the competence of the audit client's employees, because their competence bears directly and importantly upon the

Achievement of the objectives of internal control.

Which of the following matters is an auditor required to communicate to those charged with governance?

Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity's financial reporting process.

Each of the following statements is correct regarding the likely sources of potential misstatements in an integrated audit except

An evaluation of the entity's information technology risk and controls should be performed separately from the top-down approach.

Control activities constitute one of the five components of internal control described in the COSO model. Control activities do not encompass

An internal auditing function.

Transaction authorization within an organization may be either specific or general. An example of specific transaction authorization is the

Approval of a detailed construction budget for a warehouse.

The objective of the auditor is to identify and assess the risks of material misstatement (RMMs). The auditor therefore identifies and assesses RMMs

At the financial statement and relevant assertion levels.

Which of the following groups is considered a subgroup ordinarily charged with assisting the board of directors in fulfilling its oversight responsibilities?

Audit Committee

The auditor's understanding of an entity's internal control should be used to

Consider factors affecting the risks of material misstatement.

Which of the following components of internal control includes development and use of training policies that communicate prospective roles and responsibilities to employees?

Control environment.

Two assertions for which confirmation of accounts receivable balances provides primary evidence are

Existence and R/O

An auditor expresses an unmodified opinion on internal control over financial reporting after an audit integrated with a financial statement audit. As a result, the

Auditor believes that controls are effective.

Snow, CPA, was engaged by Master Co., a nonissuer, to audit the effectiveness of Master's internal control over financial reporting as part of an integrated audit. Snow's report should state that

Because of inherent limitations, internal control may not prevent, or detect and correct, misstatements.

An auditor's written communication of internal control related matters identified in an audit would be addressed to "those charged with governance," which would include the

Board of directors.

A secondary result of the auditor's understanding of internal control for a nonissuer is that the understanding may

Bring to the auditor's attention possible control conditions required to be communicated to the client.

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations

Client-prepared statements of account that show the details of the account balances.

Which of the following is an inherent limitation of internal control?

Collusion

The auditor's understanding of internal control is documented to substantiate

Compliance with generally accepted auditing standards.

In obtaining an understanding of controls that are relevant to audit planning, an auditor is required to obtain knowledge about the

Design of the controls included in the internal control components.

The development of constructive suggestions to a client for improvements in its internal control is a

Desirable by-product of an audit engagement.

An auditor's communication with those charged with governance is required to include the

Discussion of disagreements with management about matters that significantly affect the entity's financial statements.

In an audit of financial statements in accordance with generally accepted auditing standards, an auditor should

Document the auditor's understanding of the entity's internal control.

Which of the following activities by small business clients best demonstrates management integrity in the absence of a written code of conduct?

Emphasizing ethical behavior through oral communication and management example.

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?

Establishing budgets and forecasts to identify variances from expectations.

If an auditor performing an integrated audit identifies one or more material weaknesses in a nonissuer's internal control, the auditor should

Express an adverse opinion on the entity's internal control.

An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because

Few responses may occur because more effort is required of recipients.

Internal control cannot be designed to provide reasonable assurance that

Fraud will be eliminated.

Which of the following items is an example of an inherent limitation in an internal control system?

Human error in decision making.

Which of the following is the most logical order of performing steps I through III below? I. Tests of controls II. Understanding of internal control III. Substantive procedures

II, I, III.

The following are steps in the financial statement audit process: I. Prepare flowchart II. Gather exhibits of all documents III. Interview personnel The most logical sequence of steps is

III, II, I.

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been

Implemented.

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?

Including a list of items or invoices that constitute the account balance.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?

Incompatible duties.

An auditor's communication with the board of directors most likely should

Indicate that it is for the sole use of the board.

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

Which of the following disclaimers of liability included within a response to an auditor's confirmation request would allow the auditor to rely on the confirmation as appropriate audit evidence for an audit of a nonissuer?

Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warranty, expressed or implied.

Which of the following is a component part of the COSO's internal control framework?

Information systems.

In an integrated audit, if an auditor concludes that a material weakness exists as of the date specified in management's assertion, the auditor should take which of the following actions?

Issue an adverse opinion.

According to AU-C 315, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, not all controls are relevant to a financial statement audit. Which one of the following would most likely be considered in an audit?

Maintenance of control over unused checks.

Which of the following components of internal control contributes most to a strong control environment?

Management adheres to internal control policies.

A small private entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if

Management is closely involved in operations.

In the audit, the auditor reports on the effectiveness of an entity's internal control over financial reporting. Which of the following is not a condition of that engagement?

Management provides assurance that limitations inherent to internal control have been eliminated.

Internal controls are designed to provide reasonable assurance that

Material errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties.

An auditor decides to use the blank form of accounts receivable confirmation rather than the traditional positive form. The auditor should be aware that the blank form may be less efficient because

More nonresponses are likely to occur.

The blank form of accounts receivable confirmations may be inefficient because

More nonresponses to the requests are likely to occur.

Which of the following circumstances would be inappropriate for the auditor to communicate to those charged with governance?

No significant deficiencies in internal control exist that would affect the financial statements.

As part of understanding internal control relevant to the audit of a non issuer, an auditor does not need to

Obtain knowledge about the operating effectiveness of internal control.

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.

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both

Record and conceal fraudulent transactions in the normal course of assigned tasks.

Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to

Payments mailed to the client that have not been recorded.

An auditor should obtain an understanding of an entity's information system, including

Process used to prepare significant accounting estimates.

An issuer who is an accelerated filer subject to the Securities Exchange Act of 1934 is required to include in its annual report an auditor's opinion on whether internal control over financial reporting was

Properly designed and operated effectively.

The Sarbanes-Oxley Act of 2002 (SOX) requires management of issuers to do all of the following except

Provide a statement that the board approves changes in internal control procedures.

Risks relevant to financial reporting can arise due to which of the following circumstances?

Rapid growth in the entity's operations.

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would

Review the entity's descriptions of inventory policies and procedures.

Internal control has five components: the control environment, risk assessment, information and communication, monitoring, and control activities. Control activities relevant to an audit may be categorized as policies and procedures that pertain to

Reviewing actual performance.

Which of the following is a component of internal control?

Risk assessment.

In order to obtain an initial understanding of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures?

Risk-assessment procedures to evaluate the design of relevant controls.

Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel?

Segregation of duties.

In obtaining an understanding of an issuer's internal control, an auditor does all the following except

Send Confirmations

Which of the following procedures is performed first for unreturned positive confirmations of accounts receivable?

Sending second requests for confirmation of accounts receivable.

Which of the following represents an example of an inherent limitation of internal controls?

The CEO can override a control and request a check with no purchase order.

In auditing accounts receivable, the negative form of external confirmation request most likely would be used when

The assessed risk of material misstatement relative to accounts receivable is low.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

The auditor cannot infer that all nonrespondents have verified their account information.

Which of the following statements about an auditor's communication of internal control related matters identified in an audit of a nonissuer is true?

The auditor should communicate significant internal control related matters no later than 60 days after the report release date.

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. For an auditor of a nonissuer, this understanding generally includes

The auditor's responsibility for ensuring that management and those charged with governance are aware of any significant deficiencies or material weaknesses in control that come to the auditor's attention.

A CPA had previously communicated a significant control deficiency in connection with an audit of prior financial statements of a nonissuer. As of the current audit date, the deficiency has not been corrected. What communication should be made by the CPA?

The condition should be reported.

An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should

Verify the account balance by inspecting the client's bank statements and cash receipt records.

Auditors may use positive or negative forms of confirmation requests. An auditor most likely will use

The negative form for small balances.

In the integrated audit, which of the following would not be considered an entity-level control?

The outside auditor's assessment process of internal auditor competence and objectivity.

When communicating significant deficiencies in internal control noted in a financial statement audit of a nonissuer, the communication should indicate that

The purpose of the audit was to report on the financial statements, not to provide assurance on internal control.

Under which of the following circumstances is the use of the blank form of positive confirmation of accounts receivable most likely preferable?

The recipients are likely to sign the confirmations without devoting proper attention to them.

An auditor is auditing internal control in conjunction with the audit of financial statements for an issuer. The auditor is considering the appropriate materiality level for planning the audit of internal control. Relative to the materiality level for the audit of the financial statements, materiality levels for the audit of internal control are

The same

Which of the following representations should not be included in a written report on internal control related matters identified in an audit under the AICPA's auditing standards?

There are no significant deficiencies or material weaknesses in the design or operation of internal control.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

There are unusual discrepancies between the entity's records and confirmation replies.

During the planning phase of an audit, an auditor is identifying matters for communication to those charged with governance. The auditor most likely would ask management whether

There were changes in the application of significant accounting policies.

An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect?

Two employees, who work in different departments, are circumventing an internal control.

Which of the following statements is correct concerning the use of negative confirmation requests?

Unreturned negative confirmation requests rarely provide significant explicit evidence.

An auditor is concerned about management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern?

Verifying that approved spending limits are not exceeded.

Which of the following is not a valid concept of internal control?

When one person is responsible for all phases of a transaction, there should be a clear designation of that person's responsibility.

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

When the combined assessment of inherent and control risk over the sale is high.