Audit Test 2 OBU

Controls are designed to provide assurance that:

- recorded accountability for assets is compared with the existing assets at reasonable intervals - Transactions are executed in accordance with management's authorization - Access to assets is permitted only in accordance with management's authorization

T/F - Analytical procedures are only useful at the end of the engagement as a final overview of the audited procedures

False

T/F - As a general rule, evidence about the existence of assets is considered most reliable when it is provided by the employee or department with custody of the related assets

False

T/F - Audit working papers generally provide evidence of compliance with the first two standards of field work, but not the third

False

T/F - Audit working papers should provide primary support from the client's financials statements

False

T/F - Auditors own the working papers, but they must turn any of them over to the client if the client requests the,

False

T/F - Because CPA firms need an adequate return on their time and investment, costs tend to be the primary factor influencing the auditors in deciding what evidences should be obtained

False

T/F - If strong internal control exists in a client company, then evidence obtained internally is much stronger than evidence obtained from sources outside the client company

False

T/F - Income statement accounts should not be included on the working trial balance if the accounts have been closed to retained earnings

False

T/F - No audit working papers may be discarded after the date of the audit report

False

T/F - Oral evidence is sufficient by itself if it comes from a top corporate officer.

False

T/F - Reclassification entries are used to correct for the effects of errors or fraud discovered in the client's financial statements and accounting records

False

T/F - Related party transactions have in common that they ALL result from dealings between parties related due to ownership interests

False

T/F - The risk that auditors may overlook material misstatement and issue an unqualified report when one is not warranted is the same from one engagement to the next

False

T/F - Valuation of equipment carried at $70,000 could best be established by physically inspecting the equipment

False

T/F - Working papers should be kept for no more than three years because of the cost of storage

False

T/F - working papers should never be prepared by the client's personnel

False

The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company.

False

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?

Human judgment in the decision-making process.

Which of the following is true about the auditors' consideration of internal control in a financial statement audit?

The auditors must obtain an understanding of the steps in processing major types of transactions.

Audit standards require _______ at the planning and concluding stages of the audit

Analytical procedures

Which of the following would least likely be included in an auditor's tests of controls?

Analytical procedures

Service auditors

Auditors selected by a service organization to assess systems

Type 1 Report

assesses controls and their suitability

Type 2 Report

assesses controls, suitability, and effectiveness

Representation letters are dated as of the date on the

audit report

auditors need to communicate with successor auditors ________ accepting the engagement

before

factors considered a part of the client's overall control environment?

board of directors management philosophy and operating style organizational structure

Foreign Corrupt Practices Act of 1977 prohibits ______ to foreign officials and requires companies to maintain an effective system of internal control

bribes

Corrective Controls

come into play when a misstatement is found

inspection

critical review of a document

When performing an audit of internal control under PCAOB requirements, auditors evaluate control for

design effectiveness and operating effectiveness

Goal to find a misstatement that has already been made is a type of

detective control

Shopping for accounting principles is __________ by Sarbanes-Oxley.

discouraged

Which of the following is not an advantage of establishing an enterprise risk management system within an organization

eliminates all risk

Assertions about account balances

existence - ALE exists rights and obligations - entity holds or controls rights to ALE completeness-ALL ALE has been recorded valuation and allocation- ALE are recorded at appropriate amounts

In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting oriented controls.

false

Tracing

following a transaction from a source document to recorded entries

two broad categories of information processing controls are ______ and application controls

general controls

Permanent File example

lease agreement analysis of long term debt articles of incorporation Chart of accounts

Representation Letter

letter signed by officers of the client company at the auditor's request which sets forward assertions about the company's financial position

One or more _________ in internal control result in an adverse opinion on internal control.

material misstatements

physical examination

observing assets that have physical existence

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control?

preparing bank reconciliations

Working trial balance

schedule listing the balances of accounts in the client's general ledger

Lead schedules

similar general ledger accounts get combined into total that appears on the working trial balance

Primary source of evidence about pending litigation is

the attorney letter

Stages of an Audit

1. Plan the audit 2. Obtain an understanding of the client and its environment, including internal control 3. Assess the risks of misstatement and design further audit procedures 4. Perform further audit procedures 5. Complete the audit 6. Form an opinion and issue the audit report

Type 1 Report

A report that documents a service organization's controls and documents their suitability

Type 2 Report

A report that documents a service organization's controls and documents their suitability and effectiveness

Which of the following is correct with respect to control deficiencies discovered during an audit?

All material weaknesses in internal control must be reported to the audit committee in writing

Data Interrelationships

Comparison between the relationships among financial or nonfinancial data

If the external auditors decide that the work performed by the internal auditors may be used, they should consider the internal auditors':

Competence, objectivity, and approach.

Computations

Computations made independently to prove arithmetical accuracy of client records

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?

Confirmation

Current File Examples

Confirmation of bank deposits Pension agreements Adjusted trial balance Adjusting journal entries Analysis of miscellaneous expenses Analysis of owner's equity accounts

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should:

Consider the organizational level to which the internal auditors report the results of their work

Segregation of duties is an aspect of which of the following components of internal control?

Control activities

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by

Direct participation by the owner in key record-keeping and control activities of the business

To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except:

Establish internal control with no material weakness

Reconciliation

Establishing the agreement between two sets of related accounting records

Confirmation

Establishing the validity of a balance by direct communication with an outside party

Vouching

Establishing the validity of a transaction by examining supporting documents

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with

Knowledge necessary to determine the nature, timing, and extent or further audit procedures

A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level?

Maximum

Accounting Information System

Methods are records to process, summarize, and report the company's transactions

In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that:

Misstatements have been prevented or detected.

Which of the following procedures would an auditor most likely perform before the balance sheet date?

Obtain an understanding of the client's internal control activities.

Assertions about presentation and disclosure

Occurrence- disclosed events and transactions have occurred rights and obligations- disclosed events pertain to the entity Completeness- all disclosures that should have been included are included Classification and understandability-information is presented and described clearly Accuracy and valuation- information is disclosed fairly and at appropriate amounts

Assertions about transactions and events

Occurrence- transactions, and events have occurred and pertain to the entity Completeness- ALL transactions and events have occurred and pertain to the entity Accuracy- amounts have been recorded appropriately Cutoff- T&E have been recorded in the correct period Classification- T&E have been recorded in the proper accounts

service organization

Perform data processing/computer/IT services, like payroll processing, for various clients

Client representations

Written documentation and representation from clients

Analytical Procedures

Procedures that allow auditors to evaluate financial information by studying relationships among both financial and nonfinancial data.

Reperformance

Proving the accuracy of a client-performed activity

Which of the following is an advantage of describing internal control through the use of a standardized questionnaire?

Questionnaires highlight weaknesses in the system

Third Party Representations

Representations or evidence from outside parties

An auditory compensate for a weakness in internal control by increasing the extent of

Substantive tests of details

Physical Evidence

Tangible asset from examination

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should:

Test controls for all significant accounts

A report on internal control performed in accordance with PCAOB standards includes an opinion on internal control for:

The "as-of date"

T/F - A client representation letter helps to remind the client officers of their primary and personal responsibility for the financial statements

True

T/F - A company's financial statements are the representations and assertions of the company's management.

True

T/F - A confirmation by a customer of an account receivable would be more reliable evidence than the confirmation of the petty cash by the petty cash fund custodian

True

T/F - Audit evidence may be defined as any information that corroborates or refutes the auditor's premise that the financial statements present fairly the client's financial position and operating results.

True

T/F - Some high-risk auditing situations would include clients with weak internal control, unsound financial condition, or unreliable management

True

T/F - Strong internal control will increase the reliability of certain types of evidence and reduce the overall quantity of substantive procedures performed by the auditors

True

T/F - The information contained in the auditors' working papers constitutes the principal evidence of the auditor's work and their resulting conclusions

True

T/F - Working papers should be initialed by the auditor preparing the working paper and the auditors reviewing the working paper

True

Documentary Evidence

Variety of records to support of the company's business and accounting information system

After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An primary objective of a walk-through is to:

Verify that the controls have been implemented (placed in operation).

Inherent Risk

the probability that in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements