Gleim SU 9 - Audit

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.

When engaged to express an opinion about the effectiveness of a nonissuer's internal control over financial reporting, the auditor should

Obtain management's written representation acknowledging responsibility for establishing and maintaining internal control.

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 is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. Which of the following actions by the auditor would be most efficient for obtaining information about the transfer agent's internal controls?

Review reports on the suitability of design and operating effectiveness of controls produced by the agent's own auditor.

Which of the following procedures should a user auditor include in the audit plan to create the most efficient audit when an audit client uses a service organization for several processes?

Review the service auditor's type 1 report.

Which of the following statements is true about an auditor's communication to those charged with governance?

The auditor is required to inform those charged with governance about misstatements discovered by the auditor and not subsequently corrected by management.

Management of an issuer subject to SEC requirements requests the auditor to report on whether a previously reported material weakness in internal control continues to exist. The request comes 3 months after the annual audited financial statements and report on internal control were released.

The auditor may accept the engagement if management provides a statement that the identified material weakness no longer exists.

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.

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.

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.

To what degree, if at all, is a significant deficiency related to a material weakness?

It is less severe than a material weakness.

Under the AICPA's auditing standards, which of the following statements about an auditor's communication of significant control deficiencies is true?

An auditor's report on significant control deficiencies should include a restriction on the use of the report.

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 is least likely indicative of a significant deficiency or material weakness in internal control?

A potential future internal control problem having no effect on the current period.

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.

During the audit of internal controls integrated with the audit of the financial statements, the auditor discovered a material weakness in internal control. The auditor most likely will express a(n)

Adverse opinion on internal control.

The auditor is required to communicate each of the following items to those charged with governance except

All control deficiencies detected during the course of the audit.

According to the PCAOB, each of the following statements is true with respect to the auditor's responsibility to communicate material weaknesses in internal control over financial reporting except

All such weaknesses must be communicated in writing to all stockholders.

Which of the following best describes a CPA's engagement to report on an entity's internal control over financial reporting?

An audit engagement that results in issuance of a report relating to the effectiveness of internal control.

Which of the following statements about significant deficiencies and material weaknesses in internal control is true for an audit of a nonissuer?

An auditor may communicate significant deficiencies and material weaknesses during an audit or after the audit's completion.

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.

Which of the following matters in a financial statement audit is most appropriate to communicate with those charged with governance?

An overview of the planned scope and timing of the audit.

An issuer client who disagrees with the independent auditor on a significant matter affecting its financial statements has several courses of action. Which of the following courses of action would be inappropriate?

Appeal to the FASB to review the significant matter.

An auditor encounters significant difficulties during an audit that are likely to lead to a modified opinion. When would it be most appropriate for the auditor to communicate those difficulties to the audit committee?

As soon as is practicable during the course of the engagement.

To ensure that the audit report for an issuer is prepared in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the report must

Attest to and report on the internal control assessment made by the management of the issuer.

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

Audit committee.

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.

Which of the following is true regarding significant deficiencies and material weaknesses in control for a nonissuer?

Auditors should communicate them to management and those charged with governance.

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.

Which of the following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting?

Begin by understanding the overall risks to internal control over financial reporting at the financial statement level.

An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in communication to the

Board of directors.

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.

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

Both I and II.

In an audit of internal control over financial reporting, which deficiencies in control should be communicated in writing to those charged with governance?

Both material weaknesses and significant deficiencies.

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.

A nonissuer uses a service organization whose services are part of the nonissuer's system of internal control. In the integrated audit, how does an auditor evaluate whether the service auditor's report on controls provides sufficient appropriate evidence to support an opinion on internal controls over financial reporting?

By assessing the results of the tests of controls and the service auditor's opinion on the operating effectiveness of the controls.

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.

Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to issue a report on PDC's internal controls implemented as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should

Contain a disclaimer of opinion on the operating effectiveness of PDC's controls.

The design or operation of a control may not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. According to AU-C 265, this circumstance is a

Control deficiency.

In the integrated audit of an issuer, an auditor has identified entity-level controls that are important to the conclusion as to whether the company has effective internal control over financial reporting. Each of the following is an example of an entity-level control, except

Controls over the completeness of deposited cash.

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

Desirable by-product of an audit engagement.

Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC's description of the controls implemented and their design as of a specific date. These controls are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report expressing an opinion on CSC's controls implemented as of a specific date should contain a(n)

Description of the scope and nature of Drake's procedures.

Dunn, CPA, is auditing the financial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on management's description of the controls implemented and their suitability of design at QSC regarding the processing of its customers' payroll transactions. Dunn expects to consider the effects of Price's report on the Taft engagement. Price's report should contain a(n)

Description of the scope and nature of Price's procedures.

Firms subject to the reporting requirements of the Securities Exchange Act of 1934 are required by the Foreign Corrupt Practices Act of 1977 to maintain satisfactory internal control. Moreover, the Sarbanes-Oxley Act of 2002 requires that annual reports include (1) a statement of management's responsibility for establishing and maintaining adequate internal control and procedures for financial reporting, and (2) management's assessment of their effectiveness. The role of the registered auditor relative to the assessment made by management is to

Determine whether management's report is complete and properly presented.

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

Disagreements of the amount of the LIFO inventory layer based on preliminary information.

Cain Company's management engaged Bell, CPA, to audit the effectiveness of Cain's internal control over financial reporting. Bell's report, which was accompanied by management's separate report presenting its written assessment about the effectiveness of internal control, described several material weaknesses and potential errors and fraudulent activities that could occur. Subsequently, management included Bell's report in its annual report to the board of directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should

Disclaim an opinion as to management's cost-benefit statement.

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 is conducting an integrated audit of internal control with the audit of a nonissuer's financial statements. In applying the top-down approach, the auditor first

Focuses on entity-level controls and then significant classes of transactions, account balances, and disclosures.

Which of the following most accurately describes the process of a walkthrough?

Following a transaction from its origination until it is reflected in the financial statements.

Brown, CPA, has accepted an engagement to audit the effectiveness of the internal control over financial reporting of Crow Company (a nonissuer) and to issue a report on such audit. In what form does Crow present its written assessment about effectiveness?

I only.

Which of the following issues related to internal control over financial reporting are required to be communicated in writing to management and those charged with governance?

II and III only.

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

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

Which of the following is a complete and accurate list of the walkthrough procedures usually performed in an issuer's integrated audit?

Inquiry, observation, inspection of relevant documentation, reperformance of controls.

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.

A CPA's understanding of internal control in a financial statement audit of a nonissuer

Is usually more limited than that made in an audit of internal control integrated with an audit of financial statements.

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.

In identifying matters for communication with an entity's audit committee, an auditor most likely would ask management whether

It consulted with another CPA firm about accounting matters.

AU-C 402, Audit Considerations Relating to an Entity Using a Service Organization, applies to a financial statement audit of an entity that uses services of another organization as part of its information system. For this purpose, the user auditor may need to obtain a service auditor's report. Which of the following is a true statement about a service auditor's report?

It should include an opinion.

A service auditor's report on internal control may be issued on management's description of a service organization system and the suitability of the design of controls or management's description of a service organization system and the suitability and operating effectiveness of controls. Which of the following is true about a type 1 report?

It should state that the auditor did not test the effectiveness of the controls.

Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc., to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control. Lake is considering Cope's report on EDP's internal control in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own unmodified opinion?

Lake may not refer to Cope under the circumstances above.

In reporting on an audit of an issuer's internal control over financial reporting, an auditor should include a statement that describes the

Limitations inherent to internal control.

Green, CPA, is auditing the financial statements of Ajax Co. Ajax uses the DP Service Center to process its payroll. DP's financial statements are audited by Blue, CPA, who recently issued a report on DP's policies and procedures regarding the processing of other entities' transactions. In considering whether Blue's report is satisfactory for Green's purposes, Green should

Make inquiries about Blue's professional reputation.

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.

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following?

Management's assessment of the effectiveness of internal control over financial reporting.

Which of the following matters would an auditor most likely consider to be a significant deficiency or material weakness to be communicated to those charged with governance?

Management's failure to renegotiate unfavorable long-term purchase commitments.

In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client's entire board of directors. Which of the following considerations will be least relevant to this decision?

Management's preference.

The activities of the user entity and the service organization have a high degree of interaction. The user auditor

Need not test the service organization's internal control if the user entity has effective controls related to service organization processing.

A user auditor of a nonissuer should perform which of the following procedures to obtain audit evidence related to the operating effectiveness of a service organization's controls when the risk assessment includes an expectation that the controls are operating effectively?

Obtaining and reading a Type 2 report, if available.

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.

When the regular audit leading to an opinion on financial statements discloses specific circumstances that create suspicion that fraud may exist, and the auditor concludes that the results of such fraud, if any, could not be so material as to affect the opinion, (s)he should

Refer the matter to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion.

An audit client has substantial assets held in a trust that is managed by the trust department of a bank. Which of the following actions by the auditor is the most efficient way to obtain information about the trust department's internal controls?

Rely on the trust department's audit report on internal controls placed in operation and their operating effectiveness.

Moor, CPA, discovers a likely fraud during an audit but concludes that its effects, if any, could not be so material as to affect the opinion. Moor most likely should

Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion.

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

Send confirmations to customers.

Which of the following statements is true about the auditor's communication of a material weakness in internal control?

Suggested corrective action for management's consideration concerning a material weakness need not be communicated to the client.

The auditor's report expressing an opinion on the effectiveness of an entity's internal control over financial reporting should include all the following except

That the entity's internal control is consistent with that of the prior year after giving effect to subsequent changes.

During planning, an auditor of a nonissuer should communicate which of the following to those charged with governance at an entity?

The audit does not relieve management of its responsibilities for the financial statements.

A report on an issuer's integrated audit must include each of the following statements, except

The audit was conducted in accordance with AICPA standards.

When an auditor is to conduct an audit of a service organization, what considerations should the auditor make in the planning stages regarding internal controls of the organization?

The auditor should determine whether management has adequately described complementary user controls.

Which of the following statements is true about significant deficiencies identified in an audit?

The auditor should identify those significant deficiencies considered to be material weaknesses.

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 client uses a service organization to process its payroll. Which of the following statements is correct regarding the user auditor's use of the service auditor's report on internal controls placed in operation?

The client's auditor can use the service auditor's report as audit evidence for the client's internal controls.

Which of the following best describes the responsibility of an auditor of a private entity with respect to significant deficiencies and material weaknesses under AU-C 265, Communication of Internal Control Related Matters Identified in an Audit?

The communication by the auditor must be in writing.

Which of the following is true about the auditor's communication with those charged with governance?

The communication should be a two-way discourse between the auditor and those charged with governance.

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.

Which of the following matters is an auditor not required to communicate to an entity's audit committee?

The degree of reliance the auditor placed on the management representation letter.

When planning an engagement to audit the effectiveness of the entity's internal control in an integrated audit of a nonissuer, a practitioner would least likely consider which of the following factors?

The evaluation of the operating effectiveness of the controls.

Which of the following is a true statement concerning an engagement to examine the effectiveness of an entity's internal control over financial reporting?

The management evaluates the effectiveness of internal control.

An auditor would least likely initiate a discussion with a client's audit committee concerning

The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

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.

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

The process used by management in formulating sensitive accounting estimates.

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.

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 is a requirement for accepting an attestation engagement to report on the controls at a service organization?

The service auditor has the competence and capability to perform the engagement.

A service organization provides processing services for a client's sales orders. Which of the following information is relevant when gathering data for the report on the service organization's internal controls?

The service organization's system calculates accounts receivable balances.

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.

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.

Which of the following statements is true about an auditor's communication with those charged with governance?

This communication should include disagreements with management about audit adjustments, whether or not satisfactorily resolved.

Which of the following statements is true about an auditor's communication with those charged with governance?

This communication should include management changes in the application of significant accounting policies.

Which of the following best describes a CPA's responsibility to report on an issuer's (public company's) internal control over financial reporting?

To examine the effectiveness of its internal control.

What is a service auditor's responsibility, if any, with regard to other information presented in a document containing management's description of its system and the service auditor's report?

To read the other information in order to identify material inconsistencies or misstatements.

An auditor (the user auditor) may decide to make use of another auditor's (the service auditor's) report on internal control at a service organization that provides certain services to the user auditor's client. When the client's transactions flow through the service organization's accounting system, consideration of internal control may be necessary. The most efficient approach is often to obtain a service auditor's report. Which of the following is a true statement about the relationship of the user and service auditors?

When reporting on an audit of financial statements, the user auditor should not refer to the service auditor's report if the opinion is unmodified.

If a service auditor is unable to obtain a written assertion from the service organization's management regarding its system and the suitability of the design and operating effectiveness of controls, it would be most appropriate for the auditor to

Withdraw from the engagement unless prohibited by law.

In an audit engagement, should an auditor communicate the following matters to those charged with governance?

Yes Yes

The audit of internal control over financial reporting should test

Yes Yes