Study Unit 9: questions

Question 1

What kind of deficiencies are required to be communicated in writing to management and those charged with governance?

Answer 1

significant deficiencies or material weaknesses are required to be communicated in writing to management and those charged with governance.

Question 2

What is a significant deficiency?

Answer 2

A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness but merits attention by those charged with governance.

Question 3

What is material weakness?

Answer 3

A material weakness is a deficiency, or combination of deficiencies, in internal control that results in a reasonable possibility that a material misstatement of the financial statements will not be prevented, or detected and corrected, on a timely basis. A reasonable possibility means that the probability of the event is more than remote.

Question 4

During consideration of internal control in a financial statement audit, an auditor is not obligated to

Answer 4

Search for significant deficiencies in the operation of internal control.

Question 5

True or False: All significant deficiencies are material weaknesses in the design or operation of specific internal control components.

Answer 5

FALSE: All material weaknesses are significant deficiencies, but not all significant deficiencies are material weaknesses.

Question 6

The development of constructive suggestions to a client for improvements in its internal control is a:

Answer 6

Desirable by product of an audit engagement.

Question 7

An auditor may issue a report that no significant deficiencies in IC exist that would affect the FSs. Is that correct?

Answer 7

NO, an auditor may issue a written communication stating that no material weaknesses were identified if the auditor complies with the applicable requirements for such communications. But a written communication stating that NO significant deficiencies were identified is prohibited. It might be misunderstood or misused.

Question 8

When should an auditor communicate significant IC related matters?

Answer 8

No later than 60 days after the report release date.

Question 9

If a CPA had previously communicated a significant control deficiency in connection with an audit of prior financial statements of a nonissuer. As of the current audit date, the deficiency has not been corrected. Should the auditor communicate the situation again and does it matter if he relying on those controls?

Answer 9

AU-C 265 requires communication about significant deficiencies and material weaknesses and makes no exception solely for previous reporting of a condition. This can be accomplished by a written communication referring to the previously written communication and the date of that communication.

Question 10

A communication of significant control deficiencies should:

Answer 10

(1) state that the purpose of the audit was to report on the financial statements, not to provide assurance on internal control;
(2) give the definition of significant control deficiencies and material weaknesses; and
(3) state that the report is intended solely for the information and use of those charged with governance, management, and others within the organization (or specified regulatory agency) and is not intended to be, and should not be, used by anyone other than the specified parties.

Question 11

Suggested corrective action for management’s consideration concerning a material weakness need to be communicated to the client: true or false?

Answer 11

Although the auditor should communicate material weaknesses to management and those charged with governance, suggested corrective action need not be communicated.

Question 12

The matters to be discussed with those charged with governance include:
DISAPPROVE

Answer 12

Disagreement with mgmt about accounting policies or audit procedures whether or not satisfactorily resolved
Noncompliance with applicable laws and regulations (Illegal acts)
Significant accounting policies
Adjustments
Prior discussions with management
Problems
Responsibilities
Other information regarding responsibilities
Views of other accountants
Estimates

Question 13

Auditor disagreements with management about significant matters, whether or not satisfactorily resolved, should be communicated to those charged with governance. Do disagreements include differences of opinion based on preliminary information or incomplete facts that are later resolved?

Answer 13

However, disagreements do not include differences of opinion based on preliminary information or incomplete facts that are later resolved.

Question 14

An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. What should the auditor do to obtain info about the transfer agent’s internal controls?

Answer 14

Review reports on the suitability of design and operating effectiveness of controls produced by the agent’s own auditor.

Question 15

When a user auditor has to rely on service auditors report on IC, what should the user auditor be satisfied about:

Answer 15

(1) the service auditor’s professional competence and

(2) the adequacy of the standards governing the type 1 or type 2 report.

Question 16

What are the Type 1 and Type 2 reports?

Answer 16

Type 1 report-report on mgmt’s description of a service organization’s system and the suitability of the design of controls.
Type 2 report-report on mgmt’s description of a service organization’s system and the suitability of the design and operating effectiveness of controls.

Question 17

When reporting on an audit of financial statements, the user auditor should:

Answer 17

should not refer to the service auditor’s report if the opinion is unmodified.
Because the service auditor is not responsible for auditing any portion of the financial statements being reported on by the user auditor, the service auditor should not be referred to in the user auditor’s report if the opinion is unmodified. But if the user auditor modifies the opinion because of a modified opinion by the service auditor, the user auditor may refer to the service auditor.

Question 18

In an integrated audit of a nonissuer, if an auditor concludes that a material weakness exists as of the date specified in management’s assertion, the auditor should issue what kind of opinion?

Answer 18

Issue an adverse opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of the entity’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness requires the auditor to express an adverse opinion on the effectiveness of internal control.

Question 19

The auditor of an issuer must express an opinion on the effectiveness of internal control. The opinion should be expressed

As of a Specified Date
For a Specified Period of Time

A. NoYes
B. YesNo
C. YesYes
D. NoNo

Answer 19

Yes No
According to PCAOB’s AS No. 5, the report states the auditor’s opinion on whether the entity maintained, in all material respects, effective internal control over financial reporting as of the specified date based on the control criteria. The date typically is the end of the fiscal period. For a nonissuer, the practitioner may examine the effectiveness of internal control during a period of time (AT 501).

Question 20

An auditor is auditing internal control in conjunction with the audit of financial statements for an issuer. The auditor is considering the appropriate materiality level for planning the audit of internal control. Relative to the materiality level for the audit of the financial statements, materiality levels for the audit of internal control are

Answer 20

The same. AS No. 5 indicates that the auditor should use the same materiality considerations in the audit of internal control over financial reporting that (s)he would use in planning the audit of annual financial statements.

Question 21

The top-down approach to evaluating internal control begins:

Answer 21

at the financial statement level by understanding overall risks, focusing on entity-level controls, and then working down to significant accounts. Examples of entity-level controls are controls (1) related to the control environment, (2) over management override, (3) to monitor results of operations, (4) over the period-end financial reporting process, and (5) to monitor other controls.