Samples to test internal control are intended to provide a basis for an auditor to conclude whether:
Answer(s): A
Choice "a" is correct. Samples to test internal control are intended to provide a basis for an auditor to conclude whether the control activities are operating effectively. Choice "b" is incorrect. Tests of controls may provide evidence regarding the likelihood of misstatement, but they do not provide a basis for concluding whether the financial statements are materially misstated.Choice "c" is incorrect. The risk of incorrect acceptance is an aspect of sampling risk related to substantive tests, not tests of controls.Choice "d" is incorrect. Samples to test controls do not provide evidence regarding materiality levels for planning purposes.
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
Answer(s): D
Choice "d" is correct. If it is unlikely that sufficient appropriate audit evidence will be available to support an opinion on the financial statements, it would be pointless to conduct an audit. Choice "a" is incorrect. The existence of significant related party transactions would not prevent the auditor from accepting an audit engagement, regardless of the whether or not such transactions occurred in the ordinary course of business. The auditor would simply need to evaluate management's methods for identifying and disclosing related party transactions, and ultimately evaluate financial statement disclosure, as part of the audit. Choice "b" is incorrect. Internal control activities are often subject to management override, but this is no reason to reject a potential audit engagement. Rather, this risk should be assessed, and audit procedures should be designed only after taking into account the assessed level of risk. Choice "c" is incorrect. An inefficient system of information technology for recording financial transactions may not be optimal for the company, but as long as it is an effective system (i.e., as long as it provides reliable financial reporting), it will not affect the auditor's decision regarding acceptance of a new audit engagement.
Prior to commencing field work, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time?
Answer(s): C
Choice "c" is correct. Prior to commencing field work, the auditor would likely discuss with management any assistance desired from client staff. This is part of establishing an understanding with the client.Choice "a" is incorrect. Prior to commencing field work, the auditor likely would be unaware of the specific matters to be included in the communication to those charged with governance. Choice "b" is incorrect. While the auditor may set a preliminary measure of materiality, this is a matter of auditing judgment and would not typically be discussed with the client. In addition, significant internal control weaknesses are reported because they indicate a potential for material misstatement, regardless of whether any actual misstatements exceed a particular threshold. Choice "d" is incorrect. Prior to commencing field work, the auditor would be unlikely to have identified inadequate controls or evaluated their possible effects.
As the acceptable level of detection risk increases, an auditor may change the:
Choice "c" is correct. As the acceptable level of detection risk increases, the assurance (effectiveness) that must be provided from substantive tests can decrease. Thus the auditor may change the timing of substantive tests from year-end to an interim date.Choice "a" is incorrect. The assessed level of control risk is used to determine the acceptable level of detection risk, not vice versa.Choice "b" is incorrect. The acceptable level of detection risk affects the nature, timing and extent of substantive audit procedures, not control tests.Choice "d" is incorrect. As the acceptable level of detection risk increases, the level of assurance required from substantive tests decreases, and therefore the substantive procedures need not be as effective.
An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice:
Choice "d" is correct. Applying substantive tests to the details of asset and liability accounts as of an interim date increases risk, as it is possible that errors will occur between the date of interim testing and the balance sheet date. For this reason, the auditor generally selects for interim examination only accounts that are reasonably predictable with respect to amount, relative significance, and composition, and must also identify procedures sufficient to extend interim conclusions to year-end. Choice "a" is incorrect. The use of statistical sampling methods is not affected by the timing of audit procedures.Choice "b" is incorrect. Applying substantive tests to the details of asset and liability accounts as of an interim date increases risk, but it does not require all such tests to be reperformed. Instead, the auditor should perform procedures designed to extend the interim conclusions to year-end. Such procedures should be less in scope than the initial procedures performed at interim; otherwise, it would make more sense to have simply applied the more extensive tests at year-end in the first place.Choice "c" is incorrect. Generally, accounts selected for interim examination should be reasonably predictable with respect to amount, relative significance, and composition. Rapidly changing economic conditions might affect the valuation, significance, or composition of certain assets or liabilities, and therefore would make testing at interim less likely.
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