Quick Service Center processes the payroll for a variety of clients, including James Industries. Adams, CPA, is Quick's auditor, while Robinson, CPA, is the auditor for James Industries. Which of the following is not required of Adams?
Answer(s): B
Choice "b" is correct. The user auditor (Robinson) would make inquiries regarding the professional reputation of the service auditor (Adams), not vice versa. Choice "a" is incorrect. The service auditor is required to describe the scope and nature of the procedures performed.Choice "c" is incorrect. The service auditor is required to inquire of management regarding subsequent events that would have a significant effect on user organizations. Choice "d" is incorrect. The service auditor is required to obtain a management representation letter.
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:
Answer(s): D
Choice "d" is correct. The auditor's ultimate purpose of assessing control risk is to evaluate the risk of financial statement misstatement.Choice "a" is incorrect. The auditor's evaluation of whether or not specific internal control activities are operating as designed is part of his/her assessment of control risk; however, the ultimate purpose of making this assessment is to evaluate the risk of financial statement misstatement. Choice "b" is incorrect. The auditor's evaluation of the collective effect of the control environment is part of his/her assessment of control risk; however, the ultimate purpose of making this assessment is to evaluate the risk of financial statement misstatement. Choice "c" is incorrect. Tests of controls are not used to identify activities relevant to assertions. Tests of controls are used to evaluate the operating effectiveness of internal control in preventing or detecting material misstatements.
An auditor's primary consideration in evaluating controls is whether specific controls:
Answer(s): A
Choice "a" is correct. An auditor's primary consideration in evaluating controls is whether specific controls affect financial statement assertions, since ultimately the auditor must render an opinion on whether those assertions are fairly stated.Choice "b" is incorrect. The five components of internal control provide a useful framework for the auditor to evaluate the impact of such controls on an audit, but such classification is not the auditor's primary consideration.Choice "c" is incorrect. Although a proper system of internal control may improve the client's operational efficiency, it is not a primary consideration for the auditor. Choice "d" is incorrect. The auditor controls detection risk by varying the nature, timing, and extent of substantive tests. Whether or not a proper system of controls is in place affects control risk, not detection risk.Responding to Assessed Risk
An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?
Answer(s): C
Choice "c" is correct. When auditing procedures are performed before year-end, additional procedures should be performed to extend the interim conclusions to year-enD. Large balances would be tested by reviewing supporting evidence, and significant changes in the balance would also be investigated.Choice "a" is incorrect. The auditor would not send confirmations for all new customer balances, but instead would focus on those that appear material.Choice "b" is incorrect. The purpose of performing tests at interim is to minimize the amount of work that needs to be performed at year end, to improve efficiency. If confirmations were sent at interim, and the auditor was satisfied with the results of that testing, there would be no reason to send additional confirmations. Rather, interim conclusions would be extended by focusing on any material changes in the account, including new, large balances.Choice "d" is incorrect. Review of subsequent cash collections is a means of supporting a receivables balance when no confirmation response has been received. This procedure generally would not be performed as a means of extending interim conclusions to year-end.
In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:
Choice "b" is correct. Tests of controls used in assessing control risk ordinarily include procedures such as inquiry of appropriate entity personnel, inspection of documents and reports indicating performance of the policy or procedure, observation of the application of the policy or procedure, and reperformance of the application of the policy or procedure by the auditor. Choice "a" is incorrect. Analytical procedures are used in planning the audit, as a form of substantive testing, and as a final review. They are not useful in assessing control risk. Choice "c" is incorrect. Confirmation is a form of substantive testing, not a test of controls for assessing control risk.Choice "d" is incorrect. Verification is a form of substantive testing, not a test of controls for assessing control risk.
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