The auditor should obtain sufficient knowledge of the client's information and communication system relevant to financial reporting to understand all of the following, except:
Answer(s): D
Choice "d" is correct. Ordinarily, audit planning does not require an understanding of the control activities related to each account balance, transaction class, and disclosure component in the FS or to every assertion relevant to them.Choice "a" is incorrect. The auditor is required to understand significant classes of transactions and how they are processed.Choice "b" is incorrect. The auditor is required to understand the financial reporting process. Choice "c" is incorrect. The auditor is required to understand the methods used by the entity to communicate matters relevant to financial reporting.
Which of the following information discovered during an audit most likely would raise a question concerning possible illegal acts?
Answer(s): B
Choice "b" is correct. Information that may raise a question concerning possible illegal acts include unusually large payments made to:· Cash· Bearer· Purchase cashiers checks· Transfer funds to numbered accountsChoice "a" is incorrect. Related party transactions may provide an indication of fraud, particularly if not made in the ordinary course of business, but they are generally not indicative of illegal acts. Choice "c" is incorrect. Failure to correct material internal control weaknesses may represent a conscious decision by management to accept that degree of risk because of cost or other considerations.Choice "d" is incorrect. Contributions to local political candidates are legal and generally would not raise a question about possible illegal acts.
Which of the following is not a control environment factor?
Choice "d" is correct. Policies and procedures involving segregation of duties are control activities, not control environment factors.Choice "a" is incorrect. Participation of those charged with governance is a control environment factor. Choice "b" is incorrect. Hiring and advancement policies are part of human resource policies and practices, which are control environment factors.Choice "c" is incorrect. Management's approach toward business risks is part of its philosophy and operating style, which is a control environment factor.
An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the:
Answer(s): C
Choice "c" is correct. When an auditor cannot rely on management's representations, he or she should withdraw from the engagement.Choice "a" is incorrect. As long as the client takes appropriate remedial action, the auditor would not need to withdraw from the engagement simply because the client receives federal financial assistance.However, the auditor would be subject to a variety of reporting requirements related to this discovery.Choice "b" is incorrect. If there is no evidence that an illegal act was committed, management may be unable to take remedial action against the related employees. As long as the illegal act is immaterial and the auditor is satisfied that management's response is appropriate in the circumstances, there would be no reason for the auditor to withdraw. Choice "d" is incorrect. The auditor should evaluate the adequacy of disclosure in the financial statements with respect to the potential effects of an illegal act. If the auditor concludes that disclosure is inadequate, he or she should express a qualified or adverse opinion, but would not necessarily need to withdraw from the engagement (unless the client refused to accept the modified report).
Which of the following statements is true regarding the risk assessment component of internal control?
Choice "c" is correct. The auditor needs to understand how management addresses risks relevant to financial reporting in order to properly plan the audit. Choice "a" is incorrect. An entity's risk assessment differs from an auditor's assessment of audit risk.The entity is concerned with managing risks that affect entity objectives (financial reporting, operations, and compliance) whereas the auditor is concerned with the risk that material misstatements could occur in the financial statements.Choice "b" is incorrect. The five components of internal control are applicable to the audit of every entity.Choice "d" is incorrect. The auditor needs to understand how management addresses risks relevant to financial reporting in order to properly plan the audit.
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