ACG 5637 Chapter Notes - Chapter 11: Subledger, Transaction Processing, General Ledger

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chocolateleopard236

11 Nov 2020

School

University of Florida

Department

Accounting

Course

ACG 5637

Professor

Blake Bowler

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Document Summary

The purpose of tests of controls in a gaas audit is for the auditor to obtain support for the auditor"s decision that the auditor can rely on important internal controls to reduce the risk of material misstatement. The controls of primary important for all audits are those that shift risk from a significant level to an acceptable level. Auditors often examine a sample of transactions for documentary evidence of proper approval and processing. Other forms of documentation include obtaining exception reports and determining whether problems are handled promptly and appropriately. Conclusions about residual risks from sales and customer service: After completing a process map and internal threat analysis, the auditor should have adequate knowledge and evidence to assess the residual risks in a process that are potentially significant. Planning tests of management assertions: revenue and accounts receivable. The purpose of substantive tests of fs assertions is to provide direct evidence that an account is not materially misstated.

Related Questions

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.

2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.

3-There are no restrictions in relying upon the work of internal auditors.

4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.

2-amount of misstatement on the financial statements that would influence a decision maker.

3-underlying evidence upon which the audit opinion is based.

4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.

2-perform preliminary analytical review procedures.

3-do all of the listed actions.

4-obtain approval for the audit engagement from the SEC.

Which of the following best represents financial statement fraud?

1-The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors.

2-The controller of the company decreases a contingent liability by $3 million so the company will meet analysts' expectations this quarter.

3-The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

4-The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

Sampling risk is the risk that

1-errors are inherent and may be present in the population without regard to the internal controls.

2-the population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect.

3-internal controls are not adequate to prevent or detect material errors.

4-the sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.

Control risk that is assessed excessively high (i.e. the auditor believes control risk is high when in reality it is moderate or low) leads to:

1-audit inefficiency.

2-a less expensive audit.

3-reduced substantive testing.

4-errors that are more likely to occur than anticipated.

The purchasing process consists of each of the following phases except

1-receipts of goods and services.

2-approval of items for payment.

3-authorized request for goods and services.

4-cash receipts.

Lew Pherson and Vera Collier are friends who are employed bydifferent CPA firms. One day during lunch they are discussing theimportance of internal control in determining the amount of auditevidence required for an engagement. Pherson expresses the viewthat internal control must be evaluated carefully in all companies,regardless of their size or whether they are publicly held, in asimilar manner. His CPA firm requires a standard internal controlquestionnaire on every audit as well as a flowchart of everytransaction area. In addition, he says the firm requires a carefulevaluation of the system and a modification in the evidenceaccumulated based on the controls and deficiencies in the system.Collier responds by saying she believes that internal controlcannot be adequate in many of the small companies she audits;therefore, she simply ignores internal control and acts under theassumption of inadequate controls. She goes on to say, "Why shouldI spend a lot of time obtaining an understanding of internalcontrol and assessing control risk when I know it has all kinds ofweaknesses before I start? I would rather spend the time it takesto fill out all those forms in testing whether the statements arecorrect."

a.Express in general terms the most important difference betweenthe nature of the potential controls available for large and smallcompanies.

b. Criticize the positions taken by Pherson and Collier, andexpress your own opinion about the similarities and differencesthat should exist in understanding internal control and assessingcontrol risk for different-sized companies.

c.Discuss whether Collier's approach is acceptable underexisting auditing standards for either public or non-publiccompanies.

18A.) An auditor determines that a client who received a federalgrant fraudulently reported information to the federal government.The clientâs management refuses to acknowledge the fraud. Which ofthe following parties should the auditor contact first?

The recipients of the clientâs services.

The state attorney generalâs office.

The agency that provided the grant.

The state accountancy board.

17B.) Reporting standards for financial audits underGovernment Auditing Standards differ from reportingstandards under generally accepted auditing standards in thatGovernment Auditing Standards require the auditor to

Present the results of the auditorâs tests of economy andefficiency regarding the use of the entityâs resources.

Describe the scope of the auditorâs tests of compliance withlaws and regulations.

Provide negative assurance that the auditor discoveredno transactions that were indicative of illegalacts.

Provide positive assurance that the entityâs audit committee isadequately informed about the effects of any illegal acts.

16 C.) When reporting on an entityâs internal control overfinancial reporting in compliance with generally acceptedgovernment auditing standards, an auditor should issue a writtenreport that includes a

Statement of positive assurance that the results of testsindicate that internal control either can, or cannot, be relied onto reduce control risk to an acceptable level.

Statement of negative assurance that nothing came to theauditorâs attention that caused the auditor to believe significantdeficiencies were present.

Description of the scope of the auditorâs testing of internalcontrol.

Description of the material weaknesses and the strengths thatthe auditor can rely on in reducing the extent of substantivetesting.

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ACG 5637 Chapter Notes - Chapter 11: Subledger, Transaction Processing, General Ledger

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