When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance of controls rather than their form becauseThe controls may be operating effectively but may not be documented.Management may establish appropriate controls but not enforce compliance with them.The controls may be so inappropriate that no re-liance is contemplated by the auditor. Management may implement controls whose costs exceed their benefits.
Management may establish appropriate controls but not enforce compliance with them. The requirement is to determine why an auditor should concentrate on the substance of procedures rather than their form when obtaining an understanding of an entity's controls. Answer (b) is correct because management may establish appropriate controls but not act on them, thus creating a situation in which the form differs from the substance. Answer (a) is incorrect because documentation is not directly related to the issue of substance over form. Answer (c) is incorrect because inappropriate controls is only a part of an auditor concern; for example, a control may be appropriate, but it may not be operating effectively. Answer (d) is incorrect because while an auditor might suggest to management that the cost of certain controls seems to exceed their likely benefit, this is not the primary reason auditors are concerned with the substance of controls.
An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risks of material misstatements primarily toDetermine whether procedures and records concerning the safeguarding of assets are reliable.Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized.Modify the initial assessments of inherent risk and preliminary judgments about materiality levels. Determine the nature, timing, and further audit procedures.
Determine the nature, timing, and further audit procedures. This answer is correct because the auditor uses the knowledge provided by his/her understanding of internal control and the assessed level of the risks of material misstatement in determining the nature, timing, and extent of further audit procedures.
Decision tables differ from program flowcharts in that decision tables emphasizeEase of manageability for complex programs.Logical relationships among conditions and actions.Cost benefit factors justifying the program. The sequence in which operations are performed.
Logical relationships among conditions and actions. Decision tables include various combinations of conditions that are matched to one of several actions. In an internal control setting, the various important controls are reviewed and, based on the combination of answers received, an action such as a decision on whether to perform tests of controls is determined. Program flowcharts simply summarize the steps involved in a program. Answer (a) is incorrect because decision tables do not emphasize the ease of manageability for complex programs. Answer (c) is incorrect because while decision tables may be designed using various cost benefit factors relating to the various conditions and actions, they do not justify the program. Answer (d) is incorrect because program flowcharts, not decision tables, emphasize the sequence in which operations are performed.
Which of the following is not a typical question asked during a walk-through?Have you ever been asked to override the process or controls?What do you do when you find an error?What is the largest fraudulent transaction you ever processed? What kind of errors have you found?
What is the largest fraudulent transaction you ever processed? This answer is correct because while auditors ask various questions related to fraud, they do not typically ask about an individual’s largest fraudulent transaction.
To obtain an understanding of a continuing client's business, an auditor most likely wouldPerform tests of details of transactions and balances.Review prior year working papers and the permanent file for the client.Read current issues of specialized industry journals. Reevaluate the client's internal control environment.
Review prior year working papers and the permanent file for the client. The requirement is to determine the manner in which an auditor plans an audit of a continuing client. Answer (b) is correct because a review of prior year working papers and the permanent file may provide useful information about the nature of the business, organizational structure, operating characteristics, and transactions that may require special attention. Answer (a) is incorrect because tests of details of transactions and balances occur subsequent to planning. Answer (c) is incorrect because while reading specialized industry journals will help the auditor to obtain a better understanding of the client's industry, it is likely to be less helpful than reviewing the working papers. Answer (d) is incorrect because a reevaluation of the client's internal control environment occurs subsequent to the ordinal planning of the audit.
When preparing a record of a client’s internal control, the independent auditor sometimes uses a flowchart, which can best be described as aPictorial presentation of the flow of instructions in a client’s internal computer system.Diagram which clearly indicates an organization’s internal reporting structure.Graphic illustration of the flow of operations which is used to replace the auditor’s internal control questionnaire. Symbolic representation of a system or series of sequential processes.
Symbolic representation of a system or series of sequential processes. This answer is correct because the flowchart prepared during the consideration of internal control is a symbolic representation of a system of sequential processes. It can be used in lieu of the internal control questionnaire which has the same purpose (i.e., to prepare a record of prescribed internal control).
The auditor would be least likely to be concerned about internal control as it relates toLand and buildings.Common stock.Shareholder meetings.Minutes of board of directors’ meetings.
Shareholder meetings. This answer is correct because a client’s internal control will not relate directly to shareholder meetings. CPAs will often attend the shareholder meetings and be aware of what has transpired, but important matters at such meetings are generally publicly available.
In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required toDocument the auditor's understanding of the entity's internal control.Search for significant deficiencies in the operation of internal control.Perform tests of controls to evaluate the effectiveness of the entity's internal control.Determine whether controls are suitably designed to prevent or detect material misstatements.
Document the auditor's understanding of the entity's internal control.
Which of the following controls would an auditor be least likely to review?Segregation of the asset-handling and recordkeeping functions.Company policy regarding credit and collection efforts.Cost records classified by date of product introduction.Authorization of additions to plant and equipment.
Cost records classified by date of product introduction. This answer is correct because an auditor is usually not concerned with the date a product was introduced.
An auditor considers existing internal control in order toDetermine the extent of analytical procedures which should be performed.Determine the further audit procedures which should be performed.Ascertain whether management has committed fraud. Ascertain whether any employees have incompatible functions.
Determine the further audit procedures which should be performed. This answer is correct because the auditor’s understanding of internal control allows him/her to determine the nature, timing, and extent of further audit procedures.
An auditor would most likely be concerned with controls that provide reasonable assurance about theEfficiency of management’s decision-making process.Appropriate prices the entity should charge for its products.Methods of assigning production tasks to employees. Entity’s ability to process and summarize financial data.
Entity’s ability to process and summarize financial data. This answer is correct because the controls relevant to an audit pertain to the entity’s ability to record, process, summarize, and report financial data consistent with the assertions embodied in the financial statements.
Which of the following computer documentation would an auditor most likely utilize in obtaining an understanding of internal control?System flowcharts.Record counts.Program listings. Record layouts.
System flowcharts. This answer is correct because a systems flowchart provides a graphic representation of internal control and therefore may help the auditor to obtain an understanding.
An auditor obtains knowledge about a new client's business and its industry toMake constructive suggestions concerning improvements to the client's internal control.Develop an attitude of professional skepticism concerning management's financial statement assertions.Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. Understand the events and transactions that may have an effect on the client's financial statements.
Understand the events and transactions that may have an effect on the client's financial statements. The requirement is to determine why an auditor obtains knowledge about a new client's business and its industry. Answer (d) is correct because obtaining a level of knowledge of the client's business and industry enables the CPA to obtain an understanding of the events, transactions, and practices that, in the CPA's judgment, may have a significant effect on the financial statements. Answer (a) is incorrect because providing constructive suggestions is a secondary, and not the primary, reason for obtaining knowledge about a client's business and industry. Answer (b) is incorrect because while a CPA must develop an attitude of professional skepticism concerning a client, this attitude is not obtained by obtaining knowledge about the client's business and industry. Answer (c) is incorrect because information on the business and industry of a client will provide only limited information in determining whether financial statements are materially misstated, and numerous other factors are considered in evaluating audit findings.
Which of the following is not a major reason for maintaining an audit trail for a computer system?Deterrent to fraud.Monitoring purposes.Analytical procedures. Query answering.
Analytical procedures. The requirement is to identify the reply that is not a major reason for maintaining an audit trail for a computer system. Answer (c) is correct because analytical procedures use the outputs of the system, and therefore the audit trail is of limited importance. Answer (a) is incorrect because an audit trail may deter fraud since the perpetrator may realize that his or her act may be detected. Answer (b) is incorrect because an audit trail will help management to monitor the computer system. Answer (d) is incorrect because an audit trail will make it much easier to answer queries.
One important reason why a CPA, during the course of an audit engagement, prepares internal control flowcharts is toReduce the need for inquiries of client personnel concerning the operations of internal control.Depict the organizational structure and document flow in a single chart for review and reference purposes.Assemble the internal control findings into a comprehensible format suitable for analysis. Prepare documentation that would be useful in the event of a future consulting engagement.
Assemble the internal control findings into a comprehensible format suitable for analysis. This answer is incorrect because the entire organizational structure and document flow of a large company usually cannot be depicted in a single flowchart.
In an audit of financial statements, an auditor’s primary consideration regarding a control is whether the controlReflects management’s philosophy and operating style.Affects management’s financial statement assertions.Provides adequate safeguards over access to assets. Enhances management’s decision-making processes.
Affects management’s financial statement assertions. This answer is correct because control risk should be assessed in terms of financial statement assertions.
Which of the following factors is most likely to affect the extent of the documentation of the auditor’s understanding of a client’s system of internal controls?The industry and the business and regulatory environments in which the client operates.The degree to which information technology is used in the accounting function.The relationship between management, the board of directors, and external stakeholders.The degree to which the auditor intends to use internal audit personnel to perform substantive tests.
The degree to which information technology is used in the accounting function. This answer is correct because differences in information technology use will have a major effect. For example, documentation of the understanding of a complex information system with a large volume of transactions may include flowcharts, questionnaires, and/or decision tables; documentation for an information system with limited or no use of IT and few transactions may be in the form of a memorandum.
Which of the following would not typically be a control relied upon during an audit?Use of the double-entry system.An internal audit staff.Competent personnel. A comparison-shopping staff.
A comparison-shopping staff. This answer is correct because a comparison-shopping staff is not generally relevant to recording, processing, summarizing, and reporting financial data.
Walk-throughs provide evidence that helps auditors toEvaluate design effectiveness of controls.Confirm whether controls operate with absolute completeness.Substantiate account balances.Document systems flows throughout compliance testing of operational aspects of transactions.
Evaluate design effectiveness of controls. This answer is correct because walk-throughs provide evidence to confirm their understanding of the flow of transactions and the design of controls, to evaluate the effectiveness of the design of controls and to confirm whether controls have been implemented.
A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor withAudit evidence to use in reducing detection risk.Knowledge necessary to assess the risk of misstatement.A basis from which to modify tests of controls. Information necessary to prepare flowcharts.
Knowledge necessary to assess the risk of misstatement. This answer is correct because the auditor should obtain a sufficient understanding of an entity’s control to assess the risk of material misstatement.
In a consideration of the internal control, the completion of a questionnaire is most closely associated with which of the following?Separation of duties.Documentation.Flowchart accuracy.Tests of controls.
Documentation. This answer is correct because a questionnaire may be completed during the auditor’s consideration of internal control to document the auditor’s understanding.
Which of the following procedures would an auditor least likely perform while obtaining an understanding of a client in a financial statement audit?Coordinating the assistance of entity personnel in data preparation.Discussing matters that may affect the audit with firm personnel responsible for nonaudit services to the entity.Selecting a sample of vendors' invoices for comparison to receiving reports. Reading the current year's interim financial statements.
Selecting a sample of vendors' invoices for comparison to receiving reports. The requirement is to identify the least likely procedure to be performed in planning a financial statement audit. Answer (c) is correct because selecting a sample of vendors' invoices for comparison to receiving reports will occur normally as a part of the evidence accumulation process, not as a part of the planning of an audit. Answer (a) is incorrect because coordination of the assistance of entity personnel in data preparation occurs during planning. Answer (b) is incorrect because while planning the audit, CPAs may discuss matters that affect the audit with firm personnel responsible for providing nonaudit services to the entity. Answer (d) is incorrect because any available current year interim financial statements will be read during the planning stage.
An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowchartsIdentify internal control weaknesses more prominently.Provide a visual depiction of clients' activities.Indicate whether control procedures are operating effectively.Reduce the need to observe clients' employees performing routine tasks.
Provide a visual depiction of clients' activities. The requirement is to identify an advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires. Answer (b) is correct because flowcharts provide a visual depiction of clients' activities which make it possible for auditors to quickly understand the design of the system. Answer (a) is incorrect because while the flow of operations is visually depicted, internal control weaknesses are not as obvious. Answer (c) is incorrect because while a flowchart describes a system, the flowchart alone does not indicate whether that system is operating effectively. Answer (d) is incorrect because auditors still need to determine whether the system has been placed in operation and therefore the need to observe employees performing routine tasks remains.
In the consideration of internal control, the auditor is basically concerned that internal control provides reasonable assurance thatControls have not been circumvented by collusion.Misstatements have been prevented or detected.Operational efficiency has been achieved in accordance with management plans. Management cannot override controls.
Misstatements have been prevented or detected. This answer is correct because the function of internal control, from the viewpoint of the independent auditor, is to provide reasonable assurance that material misstatements may either be prevented or discovered with reasonable promptness, thus assuring the reliability and integrity of the financial records.
During the consideration of internal control in a financial statement audit, an auditor is not obligated toSearch for significant deficiencies in the operation of the internal control.Understand the internal control and the information system.Determine whether the control activities relevant to audit planning have been implemented. Perform procedures to understand the design of internal control.
Search for significant deficiencies in the operation of the internal control. The requirement is to identify the procedure that is not required to be included in an auditor's consideration of internal control. Answer (a) is correct because the auditor need not obtain evidence relating to operating effectiveness when control risk is to be assessed at the maximum level. Answer (b) is incorrect because an auditor must obtain an understanding of the internal control environment and the information system. Answers (c) and (d) are incorrect because an auditor is obligated to obtain information on the design of internal control and on whether control activities have been implemented.
An auditor would most likely be concerned with which of the following controls in a distributed data processing system?Hardware controls.Systems documentation controls.Access controls. Disaster recovery controls.
Access controls. The requirement is to identify the types of controls with which an auditor would be most likely to be concerned in a distributed data processing system. A distributed data processing system is one in which there is a network of remote computer sites, each having a computer connected to the main computer system, thus allowing access to the computers by various levels of users. Accordingly, answer (c) is correct because numerous individuals may access the system, thereby making such controls of extreme importance. Answers (a), (b), and (d), while requiring concern, are normally considered less critical than proper access controls for this situation.
In planning an audit of certain accounts, an auditor may conclude that specific procedures used to obtain an understanding of an entity's internal control structure need not be included because of the auditor's judgments about materiality and assessments of:Control risk.Detection risk.Sampling risk.Inherent risk.
Inherent risk.If the auditor has concluded that an account is immaterial and that inherent risk is low, the auditor might decide to skip the procedures used to obtain an understanding of the related internal controls because the risk of a material misstatement occurring is low. This is really a rather tricky question because GAAS require the auditor to obtain an understanding of the internal control structure sufficient to plan the audit. In the case of immateriality combined with low inherent risk, the auditor does not need to understand the internal controls specifically related to the account in order to plan the audit.
An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor'sAssessment of control risk.Identification of weaknesses in the system.Assessment of the control environment's effectiveness. Understanding of the system.
Understanding of the system. A flowchart is a pictorial representation that utilizes a standard set of symbols to demonstrate the transaction processing procedures and accompanying data flow in an information system. It enables the auditor to summarize his/her understanding of the system in a clear, concise, and logical manner.
Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?Monitoring compliance with internal control requirements imposed by regulatory bodies.Limiting direct access to assets by physical segregation and protective devices.Establishing budgets and forecasts to identify variances from expectations. Supporting employees with the resources necessary to discharge their responsibilities.
Establishing budgets and forecasts to identify variances from expectations. The use of budgets and forecasts to compare planned and actual results will enable management to supervise more effectively than the other controls listed. It provides a means for management to establish expectations, to compare them to actual results, and then to follow up in areas where significant differences appeared. Monitoring compliance with regulatory requirements, limiting access to assets, and providing adequate support are important to the successful operation of the business but they do not necessarily help management to supervise more effectively.
Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been:Authorized.Implemented.Tested. Monitored.
Implemented. Obtaining an understanding of an entity's internal controls over financial reporting involves evaluating the design of relevant controls and determining whether they have been implemented (sometimes referred to as "placed into operation").
Which of the following most accurately describes the process of a walkthrough?Testing and documenting the results of tests of selected controlsInspection of selected documents, records, and internal control documentationObservation of an entity's activities and operations Following a transaction from its origination until it is reflected in the financial statements
Following a transaction from its origination until it is reflected in the financial statements CORRECT! A walkthrough means following a transaction from inception through the entity's accounting system until the transaction is recorded in the entity's general ledger. The purpose is to provide some degree of feedback to the auditor that the auditor's understanding of the processes and controls in a particular transaction cycle is consistent with how the entity is, in fact, apparently processing its transactions. |
Which of the following computer documentation would an auditor most likely utilize in obtaining an understanding of the internal control system?
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