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Auditing Ch 7
Terms in this set (48)
19. A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a
deficiency in operation
20. Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance?
the financial statement amounts exposed to the deficiency
21. Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control?
controls to monitor the inventory taking process.
22. Which of the following controls would most likely be tested during an interim period?
controls that operate on a continuous basis
23. If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for their assessment.
documentation and test controls over specific risk
24. Auditing Standard 5 requires an auditor to perform a walkthrough as part of the internal control audit. A walkthrough requires an auditor to
trace a transaction from each major class of transactions from origination though the company's information system until it is reflected in the company's financial reports.
25. When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period?
the walkthrough of the control system conducted at interim.
26. AnnaLisa, an auditor for N.M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the company hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weakness in any other area of the client's internal control relating to financial reporting. What kind or report should AnnaLisa issue on the effectiveness of Lileah's internal controls?
a disclaimer of opinion
27. In auditing a public company client, Natalie, and auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?
an unqualified report
28. In auditing ICFR for a public company client, Emily finds that the company has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the company has thus engaged another reputable firm to conduct the audit of internal control for the subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do?
accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion.
29. Which of the following statements concerning control deficiencies is true?
the auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.
30. Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent
significant deficiencies in the design or operation of internal control
31. Which of the following most likely represents a weakness in internal control of an IT system?
the systems analyst reviews output and controls the distribution of the output from the IT department
32. A primary advantage of using generalize audit software packages to audit the financial statements of a client that uses an IT system is that the auditor may
access information stored on computed files while having a limited understanding of the client's hardware and software features.
- issue internal control report
- maintain adequate IC
- evaluate effectiveness
compliance to complete ICFR audit
1. assume responsibility for effectiveness
2. evaluate effectiveness with suitable criteria
3. support evaluation with evidence/documentation
4. present written agreement of effectiveness
- audit and report on ICFR effectiveness
- conduct integrated audit
process to provide reasonable assurance over reliability of FR and FS prep in accordance w GAAP
ICFR control procedures
1. maintenance of records that fairly present asset info
2. provide reasonable assurance that transactions are in accordance w GAAP
3. provide reasonable assurance of prevention/timely detection of unauthorized asset handling
control design/operation prevents MGMT/employees from detecting/preventing misstatements via normal operations in a timely basis
- report to mgmt (unqualified opinion)
less severe than a material weakness but important enough to gain FR oversight's attention
- report to audit committee and mgmt (unqualified opinion)
ICFR deficiency where there's reasonable assurance that a MM is not detected/prevented on a timely basis
- report externally to audit committee and mgmt (adverse opinion)
reasonably possible / probably vs. remote
not material, but significant (SD)
not material or significant (CD)
MGMT assessment process
1. identify FR risks/controls
2. evaluate operating effectiveness of IFCR
3. consider locations to include in evaluation
MGMT must develop to support effectiveness evaluation
- many forms
- includes policy manuals, process models, flow charts, job descriptions, docs & forms
recurring financial, in normal course of business (sales, AP)
periodic (physical inventory, tax return, SEC reporting)
balances based on mgmt judgment (reserves, accruals, impairment decisions)
timing of testing
must test controls throughout year
controls for non-routine transactions
some occur after year end
first 9 months
can occur at interim
4th quarter transactions
can be tested after year end
varies based on frequency of process and audit risk
must be principal source of evidence
auditor's own work
combo of IC and FS audits
control testing impacts
planned substantive procedures
-- results considered when evaluating IC
ICFR audit planning
- risk assessment and risk of fraud
- scaling audit
- using others' work
to determine extent of using others' work
1. evaluate nature of controls
2. evaluate competence/objectivity
3. test some work to evaluate quality & effectiveness
(more risk associated with control being tested = more work for external control)
test and evaluate operating effectiveness
nature - inquiry, inspect docs, observe, reperformance
timing - interim vs. as of
extent - nature of control, frequency of operation, importance of control
evaluating identified control deficiencies
if deficiency prevents auditor from reasonable assurance that material transactions are recorded properly = treat as indicator of material weakness
indications of material weakness
- MGMT identifies fraud
- restate previous FS to correct MM
- find MM in current period (ICFR didn't )
- ineffective oversight of external FR and ICFR
correct material weakness in ICFR
- must be sufficient time to test effectiveness of control if correct MW before as of date (failure to do so = adverse opinion)
-auditor must obtain from MGMT
- failure to obtain = limits scope, prevents unqualified opinion
auditor documentation reqs
document IC audit processes, procedures, judgments, results
unqualified - IC designed and operating effectively
disclaim - serious scope limitation
adverse - MW identified
scope limitation reports
minor effect = unqualified
severe limitation = disclaim or withdraw
must tell mgmt and AC of all SD & MW
- before issue report
- tell mgmt of CDs
- tell AC of communication of CDs to MGMT
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