The management of ABC Company, a nonissuer, engaged Bell, CPA, to express an opinion on ABC's internal control. Bell's report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:
A. Disclaim an opinion as to management's cost-benefit statement.
B. Advise the Board that Bell either agrees or disagrees with management's statement.
C. Advise management that Bell's report was restricted for use only by management.
D. Advise both management and the Board that Bell was withdrawing the opinion.
Correct Answer: A
Explanation:
Choice "a" is correct. The auditor should disclaim an opinion as to management's cost-benefit statement
(i.e., "We do not express an opinion or any other form of assurance on management's cost-benefit
statement.").
Choice "b" is incorrect. The CPA should disclaim an opinion regarding management's representation.
Choice "c" is incorrect. The CPA's report on internal control is not restricted as to use.
Choice "d" is incorrect. The CPA does not need to withdraw the opinion as long as a disclaimer on
management's cost-benefit statement is presented.
Question 752:
Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?
A. An auditor need not identify and communicate material weaknesses separately from significant deficiencies.
B. All material weaknesses are significant deficiencies.
C. An auditor should report immediately material weaknesses and significant deficiencies discovered during an audit.
D. All significant deficiencies are material weaknesses.
Correct Answer: B
Explanation:
Choice "b" is correct. A material weakness in internal control is a significant deficiency that results in more
than a remote likelihood that a material misstatement in the financial statements will not be prevented or
detected.
Choice "a" is incorrect. The auditor is required to separately identify and communicate significant
deficiencies and material weaknesses.
Choice "c" is incorrect. Significant deficiencies (including material weaknesses) are generally
communicated to the appropriate parties after the audit is complete. They may, at the auditor's discretion,
be communicated during the audit, but there is no requirement for immediate communication.
Choice "d" is incorrect. A material weakness is a significant deficiency that results in more than a remote
likelihood that a material misstatement in the financial statements will not be prevented or detected. Not all
significant deficiencies will meet this description.
Question 753:
Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of controls. One of the techniques involved in this approach makes use of:
A. Controlled reprocessing.
B. An integrated test facility.
C. Input validation.
D. Program code checking.
Correct Answer: B
Explanation: Choice "b" is correct. An integrated test facility runs test transactions through the "live" system and posts to simulated (dummy) files to provide an auditor with information about the operating effectiveness of controls. Choice "a" is incorrect. Controlled reprocessing of transactions is a less common term used for parallel processing where the auditor writes a program to "reprocess" some or all of the client's live data. It does not involve the use of simulated files. Choice "c" is incorrect. Input validation is a general description of any test that ensures that the input was accurate. It does not involve the use of simulated files. Choice "d" is incorrect. Program code checking is the review of the client's program source code by a qualified auditor/IT specialist. It does not involve the use of simulated files.
Question 754:
When engaged to express an opinion on a nonissuer's internal control, an accountant should:
A. Obtain management's written assertions regarding whether the company has maintained effective internal control.
B. Qualify any opinion concerning management's assertion that the cost of correcting any weaknesses exceeds the benefits.
C. Keep informed of events subsequent to the date of the report that might have affected the accountant's opinion.
D. Disclaim an opinion on whether the system taken as a whole is sufficient to prevent or detect material errors or irregularities.
Correct Answer: A
Explanation:
Choice "a" is correct. An auditor should obtain management's written assertion about the effectiveness of
the entity's internal control.
Choice "b" is incorrect. The accountant should disclaim (not qualify) an opinion on management's
assertions that the cost of correcting weaknesses exceeds the benefits.
Choice "c" is incorrect. The accountant has no responsibility to evaluate the effect of subsequent events. In
fact, the report on an entity's internal control specifically states that projections of the internal control
evaluation to future periods is inappropriate.
Choice "d" is incorrect. The accountant does provide an opinion (and not a disclaimer) on the effective
operation of internal control.
Question 755:
In a computerized payroll system environment, an auditor would be least likely to use test data to test controls related to:
A. Missing employee numbers.
B. Proper approval of overtime by supervisors.
C. Time tickets with invalid job numbers.
D. Agreement of hours per clock cards with hours on time tickets.
Correct Answer: B
Explanation:
Choice "b" is correct. Proper approval of overtime by supervisors is least likely to be used by the auditor in
a "test data" test of controls because it is information generally not recorded in the computer.
Choices "a", "c", and "d" are incorrect. Test data is data (with a predetermined result) that is run through
the client's computer system. The auditor creates one transaction of each type of valid and invalid
conditions in which the auditor is interested and runs them through the client's processing system. The
following are recorded in the computer and are likely candidates for "test data" tests of controls:
Missing employee numbers.
Time tickets with invalid job numbers.
Agreement of hours per clock card with hours on time tickets.
Question 756:
Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files?
A. It is usually more difficult to detect transposition errors.
B. Transactions are usually authorized before they are executed and recorded.
C. It is usually easier for unauthorized persons to access and alter the files.
D. Random error associated with processing similar transactions in different ways is usually greater.
Correct Answer: C
Explanation:
Choice "c" is correct. Microcomputer systems are sometimes characterized by weak file and data security,
and are usually accessible by many office personnel. (Manual systems, in contrast, generally restrict one
user from accessing other users' files.) Thus, it is usually easier (increased risk) for unauthorized persons
to access and alter computer system files, especially microcomputer system files.
Choice "a" is incorrect. No difference exists between manual and computer-based systems for detecting
transposition errors.
Choice "b" is incorrect. Transactions should always be authorized before they are executed and recorded,
in both manual and computer-based systems.
Choice "d" is incorrect. Because computer-based processing imposes strict rules on input and processing,
generally there are fewer random processing errors.
Question 757:
An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as:
A. Deductions not authorized by employees.
B. Overtime not approved by supervisors.
C. Time tickets with invalid job numbers.
D. Payroll checks with unauthorized signatures.
Correct Answer: C
Explanation:
Choice "c" is correct. Test data often contains invalid information (such as invalid job numbers) that is used
to test EDP controls.
Choices "a", "b", and "d" are incorrect. While approvals and authorizations should all be tested, they are
not IT controls and would not be tested through use of test data.
Question 758:
With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention, which should be communicated to an entity's management and those charged with governance because they represent:
A. Material irregularities or illegal acts perpetrated by high-level management.
B. Deficiencies in the design or operation of internal control that could reasonably be expected to cause a non-inconsequential misstatement in the financial statements.
C. Flagrant violations of the entity's documented conflict-of-interest policies.
D. Intentional attempts by client personnel to limit the scope of the auditor's fieldwork.
Correct Answer: B
Explanation:
Choice "b" is correct. Significant deficiencies in the design or operation of internal control should be
communicated to management and those charged with governance because there is more than a remote
likelihood that they will result in a financial statement misstatement that is more than inconsequential.
Choice "a" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if
such acts occur through collusion).
Choice "c" is incorrect. Significant deficiencies do not necessarily involve violations of an entity's conflictofinterest policies.
Choice "d" is incorrect. Interfering with the auditor's procedures would not constitute a significant deficiency, since such interference would not affect the financial statements.
Question 759:
The two requirements crucial to achieving audit efficiency and effectiveness with a microcomputer are selecting:
A. The appropriate audit tasks for microcomputer applications and the appropriate software to perform the selected audit tasks.
B. The appropriate software to perform the selected audit tasks and client data that can be accessed by the auditor's microcomputer.
C. Client data that can be accessed by the auditor's microcomputer and audit procedures that are generally applicable to several clients in a specific industry.
D. Audit procedures that are generally applicable to several clients in a specific industry and the appropriate audit tasks for microcomputer applications.
Correct Answer: A
Explanation:
Choice "a" is correct. In microcomputer audit applications, efficient and effective system usage requires:
(1)
identification of the appropriate audit tasks and
(2)
appropriate software to perform the selected audit tasks.
Choice "b" is incorrect. Although microcomputer access to client data is desirable, it is not required.
Choice "c" is incorrect. Although microcomputer access to client data is desirable, it is not required. Also,
microcomputer audit applications need not be applicable to several clients to be efficient and effective.
Choice "d" is incorrect. Microcomputer audit applications need not be applicable to several clients to be
efficient and effective.
Question 760:
Which of the following characteristics distinguishes computer processing from manual processing?
A. Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing.
B. Errors or irregularities in computer processing will be detected soon after their occurrences.
C. The potential for systematic error is ordinarily greater in manual processing than in computerized processing.
D. Most computer systems are designed so that transaction trails useful for audit purposes do not exist.
Correct Answer: A
Explanation:
Choice "a" is correct. Computer processing virtually eliminates the occurrence of (random) computational
errors normally associated with manual processing. This is a major benefit of computer processing over
manual processing.
Choice "b" is incorrect. Depending on human involvement and review, errors or irregularities in computer
processing may not be detected quickly.
Choice "c" is incorrect. The potential for systematic errors (e.g., incorrect programming, incorrect data
entry) is greater in a computerized system due to reduced human involvement in processing.
Choice "d" is incorrect. Only poorly designed computerized systems provide no audit trail capabilities.
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