AUD - 9
The following was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, Year 1. Assume all checks are dated and issued on December 30, Year 1. Bank Accounts Disbursement Date Receipt Date Check Per Per Per Per No. From To Books Bank Books Bank 101 National Federal Dec. 30 Jan. 4 Dec. 30 Jan. 3 202 County State Jan. 3 Jan. 2 Dec. 30 Dec. 31 303 Federal American Dec. 31 Jan. 3 Jan. 2 Jan. 2 404 State Republic Jan. 2 Jan. 2 Dec. 31 Jan. 2 Which of the following checks illustrate deposits or transfers in transit at December 31, Year 1
#101 and #303
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? 1. In a separate report that accompanies Brown's report 2. As a note to the financial statements
1 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 1. Deficiencies in internal control 2. Significant deficiencies 3. Material weaknesses
2 and 3 only
Based on past experience with a client, an auditor determined performance materiality for current assets should be calculated at 1/4 of total materiality (7% of total current assets) and noncurrent assets should be calculated at 1/3 of total materiality (4% of total noncurrent assets). Calculate performance materiality for current assets based on the following: Cash and cash equivalents 900,000 Land 200,000 Accounts receivable 150,000 Prepaids 150,000 Building 400,000 Fixtures and equipment 500,000 Inventory 100,000 Leasehold improvements 100,000
22750
The following are steps in the financial statement audit process: 1. Prepare flowchart 2. Gather exhibits of all documents 3. Interview personnel The most logical sequence of steps is
3, 2, then 1
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
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
In an audit of a nonissuer's financial statements, projected misstatement is
An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample
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
An auditor's tests of controls for completeness of the revenue cycle usually include determining whether
An invoice is prepared for each shipping document
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
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
Which of the following audit activities is an analytical procedure used to form an overall conclusion to ensure that the financial statements are free from material misstatement
Comparing the current year's financial statements with those of the prior year
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
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
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
Analytical procedures used as risk assessment procedures should focus on
Enhancing the auditor's understanding of the transactions and events that have occurred since the last audit
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
Evidence of a lack of objectivity by those responsible for accounting decisions
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
A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by
Having an appropriate system of quality control
Which of the following statements is correct regarding the auditor's consideration of the possibility of noncompliance with laws and regulations by clients
If specific information concerning noncompliance with laws and regulations comes to the auditor's attention, the auditor should apply audit procedures specifically directed to ascertaining whether an act of noncompliance has occurred
In every audit, the members of the audit team should discuss the potential for material misstatement due to fraud. This discussion
Includes brainstorming about how assets can be misappropriated
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
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
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
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
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
Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls
Observing an entity's employee prepare the schedule of past due accounts receivable
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
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
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
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
During consideration of internal control in a financial statement audit, an auditor is not obligated to
Search for significant deficiencies in the operation of internal control
A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of
Statements on Standards for Attestation Engagements (SSAE)
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
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
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
Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit
The chief financial officer waived approvals on all checks to one vendor to expedite payment
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
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
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
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
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
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
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through
a system of quality control
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
adverse opinion on internal control
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
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? 1. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolved 2. Initial selection of significant accounting policies in emerging areas that lack authoritative guidance
both 1 & 2
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
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 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
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
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
In obtaining an understanding of an issuer's internal control, an auditor does all the following except
send confirmations to customers
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 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
