cpa audit review ch8 review 2

  1. Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls?

    A.Comparing an entity’s uncollectible accounts expense with actual uncollectible accounts receivable.

    B.Observing an entity’s employee prepare the schedule of past due accounts receivable.

    C.Sending confirmation requests to an entity’s principal customers to verify the existence of accounts receivable.

    D.Inspecting an entity’s analysis of accounts receivable for unusual balances.
    B.Observing an entity’s employee prepare the schedule of past due accounts receivable.

    To test the effectiveness of controls, an auditor performs procedures such as inquiry, observation, inspection, recalculation, and reperformance of a control. Thus, observing an entity’s employee prepare the schedule of past due accounts receivable provides evidence of the effectiveness of certain controls over accounts receivable.
  2. Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?

    A.Perform substantive tests as of an interim date.

    B.Use smaller, rather than larger, sample sizes.

    C.Select more effective substantive procedures.

    D.Increase of tests of controls.
    C.Select more effective substantive procedures.

    The nature, timing, and extent of the auditor’s further audit procedures should respond to the assessed RMMs at the relevant assertion level. The greater the assessed RMMs, the more persuasive audit evidence should be. To obtain more persuasive audit evidence, the auditor may increase its quantity or obtain evidence that is more relevant or reliable. Accordingly, for high RMMs, the evidence should be more appropriate (relevant and reliable), and the auditor should select more effective substantive procedures.
  3. An auditor wishes to evaluate the design and perform tests of controls over a client’s cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by
    Observation and inquiry.

    When the auditor obtains an understanding of controls relevant to the audit, (s)he performs risk assessment procedures to obtain evidence about their design and implementation. These procedures may include (1) inquiries, (2) observations of the application of the controls, (3) inspection of documents and reports, and (4) tracing transactions through the financial reporting system. Although risk assessment procedures and tests of controls differ, they may use the same types of procedures. Thus, the auditor may decide that it is efficient to test operating effectiveness and evaluate design and implementation at the same time. Furthermore, some risk assessment procedures may provide evidence about operating effectiveness. For example, the auditor may (1) inquire about the use of budgets, (2) observe comparison of budgets and actual results, and (3) inspect reports on the investigation of variances (AU-C 330 and AS No. 13). In the absence of documentary evidence, the auditor performs observation and inquiry procedures and traces transactions through the system.
  4. In performing tests of controls, the auditor will normally find that
    The rate of deviations in the sample exceeds the rate of error in the accounting records.

    When testing controls, the auditor is directly concerned with deviations from specific controls. Failure to comply with a control does not necessarily result in an error in the records. For example, the absence of an authorization signature does not necessarily mean that the transaction was improperly recorded. Accordingly, the rate of deviations from a control normally exceeds the error rate in the records.
  5. An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?

    A.The effectiveness of internal controls.

    B.The planned level of control risk.

    C.Management’s assertions that internal controls exist and are operating efficiently.

    D.The planned level of assurance at the relevant assertion level.
    D.The planned level of assurance at the relevant assertion level.

    Tests of details of transaction classes, account balances, and disclosures are substantive procedures. Some substantive procedures should be performed for all relevant assertions related to each material transaction class, balance, and disclosure. With respect to obtaining audit evidence, the auditor’s objective is to obtain sufficient appropriate evidence to be able to draw reasonable conclusions as a basis for an opinion on whether statements are materially misstated. To design and perform further audit procedures (substantive procedures and tests of controls), the auditor assesses the risks of material misstatement at the financial statement and relevant assertion levels.
  6. A nonissuer audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?
    Adopt a substantive audit approach.

    The assessment of risks is a basis for choosing the audit approach. A substantive audit approach is based only on substantive procedures. A combined audit approach applies tests of controls and substantive procedures. For example, the risk assessment procedures may not identify effective controls for the relevant assertion, or testing controls may be inefficient, e.g., because client documentation is not available. The result is that the effect of controls is excluded from the risk assessment. In these cases, if the auditor adopts the substantive audit approach, (s)he needs to be satisfied that it will be effective in reducing audit risk to an acceptable level. For example, the substantive audit approach may not be feasible when the processing of routine transactions is highly automated with little manual intervention. In this case, the combined audit approach is chosen. Moreover, the auditor should design and perform some substantive procedures for all relevant assertions related to each material transaction class, account balance, or disclosure regardless of the assessment of the RMMs or the choice of audit approach.
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cpa audit review ch8 review 2
cpa audit review ch8 review 2