CPA Audit
Regardless of the assessed level of control risk, an auditor would perform some
✔✔Substantive tests to restrict detection risk for significant transaction classes.
An auditor must always perform substantive tests for significant account balances and
transaction classes. Although a lowered control risk assessment allows the auditor to reduce
substantive testing, it cannot be used to eliminate substantive testing.
Analytical procedures are not used to verify the design of internal control. They are used in
planning, as substantive tests, and for overall review.
Which of the following matters would an auditor most likely consider to be a significant
deficiency to be communicated to the audit committee (or otherwise those charged with
governance)? ✔✔Evidence of a lack of objectivity by those responsible for accounting
decisions.
A significant deficiency is a control deficiency in the design or operation of internal control that
can adversely affect the financial statements.
If those responsible for accounting decisions appear to lack objectivity, the resultant accounting
decisions may result in material misstatements of the financial statements.
For example, revenue recognition decisions might be made to increase current period net
income (and managerial bonuses).
Management's failure to renegotiate unfavorable long-term purchase commitments represents
a poor business decision, not an internal control deficiency. It would not be considered a
significant deficiency.
When reporting on conditions relating to an entity's internal control observed during an audit
of the financial statements, the auditor should include a ✔✔Restriction on the distribution of
the report.
A report on internal control related conditions should include a restriction on the distribution of
the report. The report should be limited to the information and the use of the audit committee,
management (or those in governance), and others within the organization.
A report on internal control-related conditions issued as a result of a financial statement audit
would NOT include a paragraph describing the inherent limitations of internal control.
, That type of paragraph would be included in a report issued as a result of an attestation
engagement on internal control.
Which of the following factors should an auditor consider in making a judgment about whether
an internal control deficiency is so significant that it is a significant deficiency?
I. Diversity of the entity's business.
II. Size of the entity's operations. ✔✔Both I and II.
A significant deficiency is a control deficiency in the design or operation of internal control that
can adversely affect the entity's ability to initiate, record, process, and report financial data in
the financial statements.
Factors to be considered in evaluating deficiencies include the entity's size, its complexity, and
the nature and diversity of its business activities.
Both the diversity of the entity's business and the size of the entity's operations would be
considered.
Which of the following statements is correct concerning significant deficiencies in an audit?
✔✔An auditor may orally communicate material weaknesses and significant deficiencies during
an audit engagement.
The auditor is permitted to orally communicate internal control related matters during
fieldwork as deemed appropriate. However, the auditor must nonetheless communicate all
material weaknesses and significant deficiencies in writing as required by professional
standards, including those that may have been communicated orally during fieldwork.
While an auditor is required to communicate significant deficiencies noted during an audit,
there is no requirement to search for significant deficiencies.
For which of the following judgments may an independent auditor share responsibility with an
entity's internal auditor who is assessed to be both competent and objective?
I. Materiality of misstatements
II. Evaluation of accounting estimates ✔✔Neither.
Regardless of the assessed level of control risk, an auditor would perform some
✔✔Substantive tests to restrict detection risk for significant transaction classes.
An auditor must always perform substantive tests for significant account balances and
transaction classes. Although a lowered control risk assessment allows the auditor to reduce
substantive testing, it cannot be used to eliminate substantive testing.
Analytical procedures are not used to verify the design of internal control. They are used in
planning, as substantive tests, and for overall review.
Which of the following matters would an auditor most likely consider to be a significant
deficiency to be communicated to the audit committee (or otherwise those charged with
governance)? ✔✔Evidence of a lack of objectivity by those responsible for accounting
decisions.
A significant deficiency is a control deficiency in the design or operation of internal control that
can adversely affect the financial statements.
If those responsible for accounting decisions appear to lack objectivity, the resultant accounting
decisions may result in material misstatements of the financial statements.
For example, revenue recognition decisions might be made to increase current period net
income (and managerial bonuses).
Management's failure to renegotiate unfavorable long-term purchase commitments represents
a poor business decision, not an internal control deficiency. It would not be considered a
significant deficiency.
When reporting on conditions relating to an entity's internal control observed during an audit
of the financial statements, the auditor should include a ✔✔Restriction on the distribution of
the report.
A report on internal control related conditions should include a restriction on the distribution of
the report. The report should be limited to the information and the use of the audit committee,
management (or those in governance), and others within the organization.
A report on internal control-related conditions issued as a result of a financial statement audit
would NOT include a paragraph describing the inherent limitations of internal control.
, That type of paragraph would be included in a report issued as a result of an attestation
engagement on internal control.
Which of the following factors should an auditor consider in making a judgment about whether
an internal control deficiency is so significant that it is a significant deficiency?
I. Diversity of the entity's business.
II. Size of the entity's operations. ✔✔Both I and II.
A significant deficiency is a control deficiency in the design or operation of internal control that
can adversely affect the entity's ability to initiate, record, process, and report financial data in
the financial statements.
Factors to be considered in evaluating deficiencies include the entity's size, its complexity, and
the nature and diversity of its business activities.
Both the diversity of the entity's business and the size of the entity's operations would be
considered.
Which of the following statements is correct concerning significant deficiencies in an audit?
✔✔An auditor may orally communicate material weaknesses and significant deficiencies during
an audit engagement.
The auditor is permitted to orally communicate internal control related matters during
fieldwork as deemed appropriate. However, the auditor must nonetheless communicate all
material weaknesses and significant deficiencies in writing as required by professional
standards, including those that may have been communicated orally during fieldwork.
While an auditor is required to communicate significant deficiencies noted during an audit,
there is no requirement to search for significant deficiencies.
For which of the following judgments may an independent auditor share responsibility with an
entity's internal auditor who is assessed to be both competent and objective?
I. Materiality of misstatements
II. Evaluation of accounting estimates ✔✔Neither.
