1
Q
What is the purpose of performing a walkthrough?
A
Obtain some feedback as to whether the way the auditor has understood (and documented) the entity’s internal controls is consistent with the way the entity is actually processing such transactions.
2
Q
List the disadvantages of Internal Control Questionnaires (ICQs) to document the auditor’s understanding of internal controls.
A
- These are generic and not tailored to any client specifically; 2. Irrelevant questions may annoy clients; 3. Client might conceal deficiencies by incorrect answers.
3
Q
Define transaction cycle.
A
A group of essentially homogeneous transactions, that is, transactions of the same basic type.
4
Q
List the advantages of Internal Control Questionnaires (ICQs) to document the auditor’s understanding of internal controls.
A
- Can have a standard form for many clients; 2. Deficiencies are easily indicated by “no” answers.
5
Q
List the advantages of narratives (memos) to document the auditor’s understanding of internal controls.
A
- Tailored to client; 2. Can be as detailed or as general as desired; 3. Easy to prepare; 4. Easy to read.
6
Q
Identify 3 procedures an auditor might perform to obtain an understanding of internal controls?
A
- Inquiry of appropriate personnel 2. Observation of client’s activities 3. Review entity’s documentation of internal controls.
7
Q
List the advantages of using flowcharts to document the auditor’s understanding of internal controls.
A
- Systematic approach with emphasis on important accounting records 2. Tailored to client 3. Fairly easy for others to review and understand 4. Easy to update from year to year.
8
Q
Identify 3 ways auditors might document their understanding of internal controls?
A
- Flowcharts of transaction cycles; 2. Internal control questionnaires; 3. Narrative write-ups (memos).
9
Q
List the disadvantages of flowcharts to document the auditor’s understanding of internal controls.
A
- Tedious and time consuming to initially prepare; 2. Might fail to recognize deficiencies by getting overly absorbed in details.
10
Q
List the disadvantages of narratives (memos) to document the auditor’s understanding of internal controls.
A
- Writing such a memo is rather unstructured, lacking a systematic approach; 2. It may be rather easy to overlook relevant internal control issues.
11
Q
When should the auditor assess the operating effectiveness of internal control?
A
Whenever the auditor contemplates a reliance strategy (which means the same thing as “assessing control risk at less than the maximum level”) and only after performing the appropriate tests of control.
12
Q
Identify 3 inherent limitations of internal controls?
A
- Cost of controls should not exceed expected benefits 2. Mistakes may occur due to carelessness, fatigue, misjudgments, etc. 3. Segregation of duties may break down due to collusion or management override of internal controls.
13
Q
When should the auditor assess the design effectiveness of internal control?
A
In planning every audit under GAAS, as a basis for determining the nature, timing, and extent of further audit procedures.
14
Q
Identify 2 reasons for assessing control risk at the maximum level.
A
- The auditor believes that the design of internal control is ineffective; or 2. The auditor believes that reliance on internal control (and performing applicable tests of control) is not an efficient audit strategy compared to a wholly substantive audit approach.
15
Q
Identify the five interrelated components of internal controls.
A
- Control Environment 2. Risk Assessment 3. Control Activities 4. Information and Communication systems 5. Monitoring.
16
Q
What is meant by the term monitoring (as it relates to internal controls)?
A
The policies and procedures involving the ongoing assessment of the efectiveness of internal control over time.
17
Q
Define the term risk assessment procedures.
A
Procedures performed to obtain an understanding of the entity and its environment, including its internal control.
18
Q
What is meant by the term control environment?
A
The policies and procedures that determine the overall control consciousness of the entity, sometimes called “the tone at the top.”
19
Q
Identify 3 risk assessment procedures that might be used by an auditor to obtain an understanding of the entity and its environment, including its internal control.
A
- Inquiries of management and others; 2. Observation and inspection; 3. Analytical procedures.
20
Q
What is meant by the term risk assessment?
A
The policies and procedures involving the identification, prioritization, and analysis of relevant risks as a basis for managing those risks.
21
Q
What is meant by the term control activities?
A
The policies and procedures that help ensure that management directives are carried out especially those related to (1) segregation of duties, (2) physical controls, (3) authorization of transactions, (4) performance reviews, and (5) information processing.
22
Q
What are the three objectives of internal control as identified in the definition of internal control?
A
- Reliability of financial reporting 2. Effectiveness and efficiency of operations 3. Compliance with applicable laws and regulations.
23
Q
What is meant by the term information and communication systems?
A
The policies and procedures related to the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities.
24
Q
Define “internal control.”
A
A process - effected by those charged with governance, management, and other personnel - designed to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.
25
What specific matters should the auditor document regarding the auditor's assessment of the risks of material misstatement?
The discussion with key members of the audit team about the risks of material fraud and errors; The major elements of the understanding of the five components of internal control; The assessment of the risks of material misstatement (at the financial statement and relevant assertion levels) and the basis for that assessment; and The risks identified and the related controls the auditor evaluated.
26
When must tests of control be performed?
When the auditor's risk assessment includes an "expectation of the operating effectiveness of controls." Note that this is frequently referred to as "relying" on internal control as a partial basis for the auditor's conclusions, or "assessing control risk at less than the maximum level."
27
Define the term significant risks.
Risks that the auditor believes require special audit consideration.
28
List some examples of appropriate responses by the auditor to risks of material misstatement at the financial statement level.
Assign more experienced staff to the engagement; Provide closer supervision; Use specialists; Use more unpredictable audit procedures.
29
What is the auditor's responsibility for assessing the risk of material misstatement?
The auditor should identify and assess the risks of material misstatement (1) at the financial statement level and (2) at the relevant assertion level related to classes of transactions, account balances, and disclosures.
30
What is meant by the term deficiency in design?
When a control necessary to meet the control objective is missing, or when the control objective is not always met, even if the control operates as designed.
31
Define material weakness.
A deficiency (or combination of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis.
32
Define "significant deficiency."
A deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
33
Describe the auditor's requirements for communicating deficiencies in an entity's internal controls?
1. The auditor must communicate in writing the significant deficiencies (including material weaknesses) identified in the audit; 2. The auditor may choose to communicate lesser matters, too.
34
What is meant by the term deficiency in operation?
When a properly designed control does not operate as designed, or when the person performing the control does not have the authority or competence to effectively perform the control.
35
Describe the timing of the required communication of significant deficiencies in internal control.
Under AICPA professional standards, written communication is required no later than 60 days after the audit report release date (including matters communicated orally during the audit)
36
What is meant by the objectivity of the internal audit function?
The organizational level to which internal auditors report (organizational status).
37
Identify 2 audit procedures used to assess the relevance of an entity's internal audit activities.
1. Inquire about the internal audit function's organizational status, any limitations applicable to internal audit activities, and adherence to applicable professional standards 2. Review documentation of internal auditors' processes and selected work products.
38
Identify the 2 characteristics of the internal auditor that the auditor should evaluate before relying on the internal auditor's work.
1. Competence 2. Objectivity.
39
What is meant by the competence of internal auditors?
The internal auditors' education, certification, professional experience, etc.
40
What is meant by the term transaction cycle.
A group of essentially homogeneous transactions, that is, transactions of the same type.
41
Why do auditors emphasize transaction cycles?
Control risk is generally constant within a particular category of transactions as all transactions are processed the same way. So, the transaction cycle is the highest level of aggregation for which control risk may be viewed as a constant.
42
List the 3 categories of incompatible functions associated with segregations of duties.
Authorization of transactions (execution function); Accounting (recordkeeping function); Access to assets (custody function).
43
List some examples of major transaction cycles.
1. Revenue/receipts; 2. Expenditures/disbursements; 3. Payroll; 4. Inventory (especially for manufactured inventory); 5. Fixed assets; 6. Investing/financing.
44
How should employee responsibilities be allocated to facilitate a proper segregation of duties in the revenue/receipts (sales transactions) cycle?
1. Independent employee should review customer statements 2. Credit to customers is granted by independent department 3. Returns are accounted for by independent clerk in shipping/receiving area.
45
Identify the key accounting documents in the revenue/receipts (sales) transaction cycle, each of which should be pre-numbered.
1. Sales invoices; 2. Shipping documents for outbound shipments; 3. Receiving documents for inbound shipments including sales returns.
46
Identify the objectives of internal control related to revenue/receipts (sales transactions).
1. Goods and services provided in accordance with management's orders 2. Terms of sale are in accordance with management's orders 3. Credit terms and limits are properly established 4. Deliveries of goods and services result in accurate and timely billings 5. Sales discounts and billings are in accordance with management's authorization.
47
Describe management's role in the execution of transactions controls in revenue/receipts (sales).
1. Management should review terms of sale and note approval. 2. Management should establish general approval of sales within certain limits and specifically approve sales over those limits. 3. Management should approve all adjusting journal entries.
48
List 2 access controls applicable to the revenue/receipts (sales transactions) business process.
1. Computer passwords limit access 2. Cash receipts are handled by someone without access to accounts receivable record keeping.
49
List access controls that can be used in the Cash Receipts business cycle.
1. Employees with access to cash should be bonded 2. Access to cash receipts should be limited to those authorized.
50
What comparison techniques can be used by the auditor to ensure appropriateness of transactions in the Cash Receipts business cycle?
1. Initial cash receipts listing (remittance listing) compared to total recorded in cash receipts journal and to bank deposit 2. Cash accounts reconciled to bank statements by independent person.
51
List the internal control objectives related to the Cash Receipts business cycle.
1. Access to cash receipts records and accounts receivable records is limited to authorized personnel 2. Detailed cash and account balance records are reconciled with control accounts and bank statements monthly 3. All cash receipts are recorded in period received.
52
List some procedures used to ensure segregation of duties in the Cash Receipts business cycle.
To ensure segregation of duties, the following activities should be handled separately (by separate individuals): 1. Opening mail, handling checks received, and preparing remittance listing 2. Making deposit (daily) 3. Applying payments received to customer accounts 4. Preparing bank reconciliation on a timely basis.
53
What control mechanisms can be used to ensure the appropriate execution of transactions in the Cash Receipts business cycle?
1. Adjusting journal entries should be approved by management 2. Bank reconciliations should be reviewed by management.
54
Describe management's role in the execution of transactions controls over cash disbursements in the expenditures/disbursements transaction cycle.
1. All adjusting entries approved by management; 2. Only authorized personnel should be able to place an order for goods and services on the entity's behalf; 3. The department requesting the purchase should approve the goods or services received before payment is made.
55
List some procedures used to ensure segregation of duties in the Expenditure business cycle.
1. Separate purchasing department 2. Purchasing personnel independent from receiving and recording 3. Bank reconciliations are prepared by someone not having other involvement in handling cash receipts, disbursements, or record-keeping.
56
List 2 access controls applicable to the expenditures/disbursements transaction cycle.
1. Cash disbursement employees should be bonded; 2. Access to cash disbursements or related documents should be limited to authorized personnel.
57
Identify the objectives of internal control related to the expenditures/disbursements transaction cycle.
1. Disbursements are for authorized expenditures as approved by management. 2. Disbursements are recorded at the proper amounts and classifications. 3. The supporting accounting records are agreed to the general ledger accounts. 4. Any adjusting journal entries are authorized by management. 5. Access to cash and disbursement records is limited to authorized personnel.
58
What is the difference between an accounts payable system and a vouchers payable system?
An accounts payable system aggregates payables to identify the total owed to any individual vendor. A vouchers payable system keeps track of individual transactions for which payment is owed without summarizing the totals by vendor.
59
What comparison techniques can be used by the auditor to ensure appropriateness of transactions in the Expenditure business cycle?
1. Compare suppliers' monthly statements with recorded payables 2. Compare purchase order to receiving document to vendor's invoice.
60
Identify 3 access controls applicable to the payroll transaction cycle.
1. Access to personnel files should be limited to authorized personnel. 2. Access to payroll checks should be limited to authorized personnel. 3. Personnel with access to payroll checks should be bonded.
61
Describe management's role in the execution of transactions controls in the payroll transaction cycle.
1. Payroll should be reviewed and approved by a responsible official. 2. Computations should be verified by an independent person. 3. Overtime payments should be approved by management. 4. Payroll for management should be appropriately reviewed and approved.
62
What comparisons should be made within the entity to ensure the appropriateness of payroll transactions?
1. Payroll information should be periodically matched to information in personnel files; 2. Payroll checks should be compared to entries on the payroll register; 3. Amounts on the payroll register should be agreed to the applicable general ledger accounts.
63
Identify the objectives of internal control related to the production/manufacturing inventory transaction cycle.
1. Resources obtained and used are accurately recorded timely 2. Transfers of finished goods are accurately recorded 3. Related expenditures are appropriately classified 4. Access to inventory is restricted to authorized personnel 5. Comparisons are made of actual inventory to recorded amounts.
64
Identify the objectives of internal control in the fixed assets transaction cycle.
1. Transactions are recorded accurately in accordance with management's authorization. 2. Estimates used to record depreciation, etc. are reasonable and consistent over time. 3. Assets are safeguarded with appropriate property insurance is in force. 4. Supporting details records are properly maintained. 5. Management should approve any adjusting journal entries.
65
Identify the objectives of internal control in the investing/financing transaction cycle.
1. Transactions are recorded accurately in accordance with management's authorization. 2. Investment assets should be reasonably secure from loss. 3. Supporting detailed records should be maintained and compared to general ledger. 4. Management should approve any adjusting journal entries.
66
Describe management's role in the execution of transactions controls in the production/manufacturing inventory transaction cycle.
1. Acquisition and distribution of inventory should be in accordance with management's authorization; 2. Should establish general approval of transactions with specified limits and require specific approval for amounts over those limits; 3. Management should approve any adjusting journal entries.
67
How should employee responsibilities be allocated to facilitate a proper segregation of duties in the production/manufacturing inventory transaction cycle.?
1. Separate authorization, bookkeeping (recording), and custody of inventory 2. Sales returns should be counted by receiving clerk, who prepares an appropriate receiving document.
Wiley CPA AUD 2014
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