Advanced Auditing Chapter 18
PCAOB Standard No. ___ is "Reporting on Whether a Previously Reported Material Weakness Continues to Exist".
4
A lower-of-cost-or-market calculation is a ___ transaction.
accounting estimate
A material weakness in internal control that exists at year-end results in the issuance of an ___.
adverse opinion
In all cases in which the work of others is used, the auditors should evaluate the ___ and ___ of those individuals and test the work they have performed.
competence, objectivity
As per the SEC, management is required to accept responsibility for the ___.
effectiveness of internal control
The Sarbanes-Oxley Act of 2002 requires that, in addition to reporting upon financial statements, auditors of public companies should also report upon ___ over financial reporting.
internal control
The date specified in management's assessment is normally the__.
last day of the company's fiscal year
A significant deficiency is ___ than a material weakness.
less severe
The unique nature of ____ and the subjectivity involved with ___ transactions make them particularly prone to misstatement unless they are properly controlled.
nonroutine transactions, accounting estimate
PCAOB Standard No. 5 allows auditors to use the work__.
of others
In evaluating the significance of identified deficiencies, quantitative factors address the __.
potential amount of loss
The written communications on weaknesses to both management and the audit committee should be made ___ issuance of the audit report on internal control.
prior to
Inventory costing (CGS) is a ___ transaction.
routine
Evidence on operating effectiveness is obtained from __ and from ongoing monitoring activities related to the controls.
tests of controls
If a restriction on the scope of the audit is imposed by the circumstances, the auditors should ___ or ___.
withdraw from the engagement, disclaim an opinion
COSO stands for __ of the Treadway Commission.
Committee of Sponsoring Organizations
A client-imposed scope limitation relating to the audit of internal control ordinarily results in a qualified report, true or false?
False
An auditor's report on internal control ordinarily includes negatives assurance on the effectiveness of internal control, true or false?
False
If management's report on internal control discloses a material weakness, the auditors (who agree that it is a material weakness) will issue a report that includes a qualified opinion, true or false?
False
PCAOB standards suggest that auditors emphasize nonroutine transactions over routine transactions in their consideration of internal control, true or false?
False
The Sarbanes-Oxley changed auditor association with a client's internal control from the review to the audit form of association, true or false?
False
The amount involved with a significant deficiency is at least a material amount, true or false?
False
The lack of an effective antifraud program is always considered a material weakness, true or false?
False
PCAOB Standard No.5 covers "An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of ___".
Financial Statements
Management's report and the auditors' opinion must be included in ___, the annual report filed with the SEC.
Form 10-K
Although not required, the control framework ordinarily used for management's report is the ___, created by ___.
Internal Control-Integrated Framework, COSO
____, which applies to all public companies, requires that each annual report filed with the SEC include an internal control report prepared by management in which management acknowledges its responsibility for establishing and maintaining adequate internal control and provides an assessment of internal control effectiveness as of the end of the most recent fiscal year.
Section 404(a)
____, which applies to public companies with a market capitalization of more than $75,000,000, requires the CPA firm to audit internal control and express an opinion of the effectiveness of internal control.
Section 404(b)
Section 404 of the Sarbanes-Oxley Act of 2002 includes internal reporting requirements for both management and auditors, true or false?
True
Tests of operating effectiveness ordinarily include reperformance of the application of controls, true or false?
True
The "as-of" date for internal control reporting is ordinarily the last day of the year, true or false?
True
Since an integrated audit requires tests of controls for all major __ and relevant __, circumstances in which controls are found to be effective will lead to a decreased scope of substantive procedures as compared to a situation in which tests of controls have revealed an ineffective system or in which tests of controls have not been performed.
XXX, XXX
___ are activities involving management's judgments or assumptions, such as determining the allowance for doubtful accounts, estimating warranty reserves, and assessing assets for impairment.
accounting estimates
If a material weakness if not identified until after year-end, an ____ must be issued even if the weakness is corrected.
adverse opinion
One or more material weaknesses in internal control result in an ___.
adverse opinion
If the auditors obtain knowledge of subsequent events that materially and adversely affect the effectiveness of internal control, they should issue ___.
an adverse opinion
Section 404(a) requires the management's report to include a statement that the company's auditors have issued an ___ on management's assessment.
attestation report
A CPA doing a nonpublic integrated audit follows____.
attestation standards established by the AICPA
If management does not disclose a material weakness properly, the auditors (in addition to describing this in the audit report), must also communicate in writing to the _____ that the material weakness was not disclosed or identified as a material weakness in management's report.
audit committee
A ___ control could cause the auditors to alter their assessment of a deficiency, reducing it from one that otherwise would be considered significant (or a material weakness) to one that is simply a control deficiency.
compensating
Some controls are __ in that they work together to achieve a particular control objective.
complementary controls
A ___ exists when the design or operation of a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis.
control deficiency
The conclusion that an identified control exception does not represent a __ is only appropriate if evidence beyond what the auditors had originally planned, and beyond inquiry, supports that conclusion.
control deficiency
Management's report must be based on the SEC definition of internal control and must result from an evaluation using an accepted__.
control framework
The objective of tests of controls for a financial statement audit is to assess ____.
control risk
Knowledge obtained from prior audits is also called ___.
cumulative audit knowledge
Auditors must plan and perform the audit to obtain reasonable assurance about whether material weaknesses exist as of the ____.
date specified in management's assessment
The auditors don't have to perform tests at all locations, but should assess the risk of material misstatement to the financial statements of each location and base the amount of testing on the __.
degree of risk
If management does not disclose a material weakness properly, the auditors should state that the material weakness is not included in management's assessment and ___, which will already be adverse due to the existence of the material weakness.
describe it in the audit report
If the auditors are unable to determine the effect of a subsequent event, they should ___.
disclaim an opinion
If the auditors are unable to obtain sufficient evidence that new controls are effective for a sufficient period of time, they will issue a ___ on internal control.
disclaimer of opinion
The project to evaluate internal control can be assisted by personnel from a CPA firm that__.
does not audit the company's financial statements
Section 404(a) requires the management's report to include management's assessment of the ___ of the company's internal control over financial reporting as of ___, including a statement as to whether internal control over financial reporting is effective.
effectiveness, the end of the most recent fiscal period
Assignment of authority and responsibility is an example of an ___ control.
entity-level
Corporate codes of conduct is an example of an ___ control.
entity-level
The "tone at the top" is an example of an ___ control.
entity-level
___ often are those included in the control environment or monitoring components of internal control.
entity-level controls
The title of the engagement in a nonpublic integrated audit is ___.
examination
Five of the most important financial statement assertions are:
existence/occurrence, completeness, valuation/allocation, rights/obligations, presentation/disclosure
Efficient planning requires coordination with the__.
financial statement audit
The COSO framework is the internal control framework commonly used in audits of ___.
financial statements
The fifth stage of the audit is to___.
form an opinion on the effectiveness of internal control
Section 404(a) requires the management's report to identify management's ___ for evaluating internal control.
framework
When planning and performing the audit of internal control, the auditors should take into account the results of the financial statement __.
fraud risk assessment
Chapter 18 covers ___ audits.
integrated
PCAOB Standard No. 5 states that the internal control and financial statement audits should be viewed as ___.
integrated
An integrated audit involves an enhanced consideration of ___.
internal control
Section 404(a) requires the management's report to state that it is management's responsibility to establish and maintain adequate ___.
internal control
Inquiries of appropriate personnel are ___ persuasive than reperformance of the application of controls.
less
Inspection of relevant documents is ___ persuasive than observation of the company's operations.
less
___ are those that materially affect significant financial statement accounts-either directly through entries in the GL or indirectly through the creation of rights or obligations that may or may not be recorded in the GL.
major classes of transactions
PCAOB Standard No. 5 requires that auditors communicate in writing to __ all control deficiencies, regardless of their severity.
management
Controls to prevent ___ in a small company are more important than in a large company.
management override
A ___ does result in required modification of the Management's Assessment and Auditors' Report.
material weakness
A ___ is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that thee is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
material weakness
An ineffective audit committee oversight by itself is regarded as a strong indication that a ___ in internal control exists.
material weakness
If a reasonable possibility exists that a material amount of misstatement could occur, the deficiency is a __.
material weakness
When expressing an adverse opinion, the auditors' report must define a __, indicate that one has been identified, and refer to the description of it in management's report.
material weakness
When management's report on internal control (including its assessment) is found to be inadequate, the auditors ___ to include an explanatory paragraph describing the reasons for this determination.
modify their report
Manual controls require ___ testing than automated controls.
more extensive
A material weakness is ___ than a significant deficiency.
more severe
Attestation standard AT 501 provides guidance for performing the internal audit portion of an integrated audit for a ___ company.
non-public
In a ___ integrated audit, the report issued may indicate that no material weaknesses were identified.
non-public
A LIFO calculation is a ___ transaction.
nonroutine
A physical inventory count is a ___ transaction.
nonroutine
Financial statement close is a ___ transaction.
nonroutine
___ occur only periodically, including counting and pricing inventory, calculating depreciation expense, and determining prepaid expenses.
nonroutine transactions
A control deficiency results in required modification of the Management's Assessment and Auditors' Report___.
only if it is a material weakness
The first stage of the audit is to__.
plan the engagement
In evaluating the significance of identified deficiencies, qualitative factors consider the nature of the accounts and assertions involved in addition to the __.
possible future consequences of the deficiency
When other auditors have performed a portion of the audit, the auditors must decide whether they are able to serve as the __.
principal auditors
In a ___ integrated audit, the report issued may not indicate that no material weaknesses were identified.
public
The SEC definition of internal control includes providing ___ regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a ___ on the financial statements.
reasonable assurance, material effect
A material weakness means there is a ___ of a material misstatement.
reasonable possibility
A reasonable possibility exists when the likelihood is either ___ or ___ as those terms are used in FASB ASC 450-20 "Loss Contingencies".
reasonably possible, probable
Tests of___ (those that duplicate other controls) need not be designed when tests of the related control are planned, unless redundancy itself is a control objective.
redundant controls
___ for an account are those that have a meaningful bearing on whether the account is presented fairly.
relevant assertions
As per the SEC, management is required to provide a ___ on internal control.
report
On an overall basis, the auditors must test controls every year and cannot ___ analysis of various transaction types between various years.
rotate
__ are for recurring activities, such as sales, purchases, cash receipts and disbursements, and payroll.
routine transactions
The three major transaction types are __.
routine, nonroutine, accounting estimates
___ may result in either a disclaimer or withdrawal from the engagement depending on the extent of the limitation.
scope limitations
If auditors do not have sufficient time to test a new system, that is considered a ___.
scope restriction
The auditors may issue __ reports on the financial statements and internal control or a ___ report.
separate, combined
An account is __ if there is a reasonable possibility that it could contain a misstatement that, individually or when aggregated with others, has a material effect on the financial statements.
significant
Factors that the auditors consider in deciding whether an account is __ include size and composition, susceptibility of loss due to errors or fraud, volume of activity/complexity/homogeneity of individual transactions, nature of the account, accounting/reporting complexity, exposure to losses, possibility of significant contingent liabilities, existence of related-party transactions, and changes from the prior period.
significant
The assessment of whether an account is __ should be made without giving any consideration to the effectiveness of internal control.
significant
A __ is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.
significant deficiency
A ___ does not result in required modification of the Management's Assessment and Auditors' Report.
significant deficiency
If the deficiency is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company's financial reporting (ordinarily the audit committee) the deficiency represents a ___.
significant deficiency
____ relevant to the internal control audit are changes in internal control subsequent to year-end but before the date of the auditors' report.
subsequent events
Historically, to enhance audit efficiency and effectiveness, auditors have used a ___ audit approach that is not acceptable for integrated audits.
substantive
Regardless of the assessed level of control risk, the auditors must perform __ for all relevant assertions related to all significant accounts and disclosures.
substantive procedures
As per the SEC, management is required to support the evaluation of the effectiveness of internal control with ___.
sufficient evidence
As per the SEC, management is required to evaluate the effectiveness of internal control using___.
suitable control criteria
The requirements of Standard No. 5 have had the effect of pushing auditors to perform financial statement audits using the ___ approach- an approach with heavy reliance on internal control evidence.
systems
The third stage of the audit is to___.
test and evaluate design effectiveness of internal control
The fourth stage of the audit is to___.
test and evaluate operating effectiveness of internal control
Written communication to ___ must be issued that includes material weaknesses, significant deficiencies, and an indication that all deficiencies have been communicated to management.
the audit committee
When the auditors conclude that the oversight of the company's external financial reporting and internal control over financial reporting is ineffective, they must communicate that conclusion in writing to __.
the board of directors
Management ordinarily uses a __ approach in the initial evaluation of internal control design.
top-down
___ are those transaction flows that have a meaningful bearing on the totals accumulated in the company's significant account and, therefore, have a meaningful bearing on relevant assertions.
transaction cycles
An ___ may be issued when no material weaknesses in internal control have been identified as existing at the as-of date (year-end) and when there have been no restrictions on the scope of the auditors' work.
unqualified audit opinion
The second stage of the audit is to___.
use a top-down approach to identify controls to test
A __ involves literally tracing a transaction from its origination through the company's information system until it is reflected in the company's financial reports.
walk-through