Auditing Quality Control and Planning

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Questions and Answers

What should a practitioner obtain to effectively complete a consultation services engagement?

An appearance of independence.

An understanding of internal control to assess control risk.

A financial forecast.

Sufficient relevant data. (correct)

Which is NOT an element of a CPA firm’s quality control?

Human resources.

Engagement performance monitoring.

Leadership responsibility for quality.

Client relationship management. (correct)

What provides reasonable assurance of achieving a CPA firm's objective of compliance with professional standards?

A system of internal auditing.

A system of quality control. (correct)

Regular client feedback.

Frequent staff training sessions.

Which statement accurately defines the quality control element related to ongoing assessment of policies and procedures?

Monitoring. Signup and view all the answers

For what purpose should a CPA firm establish procedures at all organizational levels?

To ensure adherence to quality standards. Signup and view all the answers

In the context of consultation services, what should a practitioner NOT do?

Compile a financial forecast. Signup and view all the answers

Which element is essential for monitoring engagement performance in a CPA firm?

Implementation of quality control standards. Signup and view all the answers

Which approach defines how a CPA firm can maintain professional standards in services provided?

Adherence to the Philippine Code of Ethics. Signup and view all the answers

What does the audit plan primarily set regarding the audit process?

The timing and direction of the audit Signup and view all the answers

Which of the following should be considered when developing the overall audit strategy?

All of the above Signup and view all the answers

Which statement correctly describes detection risk?

It depends on the efficiency of an auditing procedure. Signup and view all the answers

Which risks can be assessed in quantitative terms?

Control risk and detection risk only Signup and view all the answers

What type of risk is associated with complex calculations in accounts such as retirement benefits?

Inherent risk Signup and view all the answers

What relationship exists between detection risk and the assurance provided by substantive tests?

An inverse relationship Signup and view all the answers

Which statement about the components of audit risk is correct?

Detection risk varies based on the effectiveness of audit procedures. Signup and view all the answers

Which statement is true regarding audit risk components?

These risks can be interrelated in practice. Signup and view all the answers

What is the initial point of presentation for defective merchandise returned by customers according to sound internal control procedures?

Receiving clerk Signup and view all the answers

What type of financial misstatement could result from inadequate internal controls over sales invoicing?

Understatement of revenues, understatement of receivables, understatement of inventories Signup and view all the answers

Which control activity would help ensure that all billed sales are accurately posted to the accounts receivable ledger?

Daily sales summaries are compared to daily postings to the accounts receivable ledger. Signup and view all the answers

What is the primary goal of an auditor when assessing the client's controls over the purchasing function?

Determine the reliability of financial reporting by the purchasing function. Signup and view all the answers

Which role is responsible for reconciling the accounts receivable subsidiary ledger to the accounts receivable control account monthly?

Accounting department supervisor Signup and view all the answers

What is an important task of the billing department supervisor in relation to sales orders?

Send copies of approved sales orders to the credit department. Signup and view all the answers

What process helps prevent the issue of goods shipped but not invoiced?

Issuing prenumbered shipping documents. Signup and view all the answers

What could be a consequence of not properly matching prenumbered shipping documents with the sales journal?

Incorrect billing for shipped goods. Signup and view all the answers

What is the least likely procedure to be omitted in tests of controls regarding accounts?

Accounts representing many transactions. Signup and view all the answers

Which type of evidence would best indicate if controls are operating as designed?

Client records documenting the use of computer programs. Signup and view all the answers

Which procedure provides the greatest assurance that control over payment for merchandise is effective?

Select and examine receiving reports to ensure related canceled checks are dated no earlier than the receiving reports. Signup and view all the answers

Which scenario should an independent auditor discuss with management regarding controls protecting against purchases?

Supplies ordered individually, without considering possible volume discounts. Signup and view all the answers

When assessing control risk in the purchasing cycle, what factor is least likely to influence the auditor?

The current economic climate affecting vendor reliability. Signup and view all the answers

Which of the following is a common misconception about confirming accounts receivable?

It provides direct evidence regarding the existence of receivables. Signup and view all the answers

In the context of auditing accounts receivable, which procedure is least effective?

Performing a detailed tests for all accounts. Signup and view all the answers

Why might an auditor choose not to perform procedures on accounts with few transactions?

Due to a lower likelihood of ineffective controls. Signup and view all the answers

What should be covered in the documentation of the understanding between the auditor, the entity, and the expert regarding the expert’s work?

The conditions under which a division of responsibility may be necessary. Signup and view all the answers

Which of the following is not considered an expert on whose work an auditor may rely?

Internal auditor Signup and view all the answers

What should the auditor do if the expert’s work does not provide sufficient appropriate audit evidence?

Resolve the matter. Signup and view all the answers

When issuing an unmodified auditor’s report, what should the auditor do regarding the expert's work?

Should not refer to the expert’s work. Signup and view all the answers

Which statement about audit evidence is correct?

The validity of audit evidence lies in the auditor’s judgment. Signup and view all the answers

How is the quantity of audit evidence required affected?

By the risk of misstatement and the quality of the audit evidence. Signup and view all the answers

What must an auditor consider when planning to use the work of an expert?

The intended use of the expert’s work and its communication to third parties. Signup and view all the answers

Why is it important for auditors to document their understanding with an expert?

To clarify the nature, scope, and objective of the expert’s work. Signup and view all the answers

Study Notes

Quality Control

CPA firms should have a quality control system to ensure professional services meet standards and regulations.
Quality control elements include:
- Human Resources
- Monitoring
- Engagement Performance

Audit Planning

An audit plan sets out the scope, timing, and direction of the audit.
The overall audit strategy is more detailed than the audit plan and includes the nature, timing, and extent of audit procedures.

Audit Risk and its Components

Audit risk is the risk that the auditor may fail to detect material misstatements.
Audit risk has three components:
- Inherent risk is the susceptibility of an account balance to material misstatements.
- Control risk is the risk that internal controls will not prevent or detect material misstatements.
- Detection risk is the risk that audit procedures will fail to detect material misstatements.

Internal Control

Internal control refers to the procedures established by management to ensure that the company's objectives are met.
Effective internal controls can reduce the risk of material misstatements and improve the reliability of financial reporting.
Internal controls exist in all business activities, including the revenue, purchasing, and inventory cycles.

Control Activities

Control activities are the specific actions taken to ensure that the company's internal controls are effective.
The most common control activities include:
- Segregation of duties
- Independent verification
- Physical controls

Tests of Controls

Tests of controls are used to assess the effectiveness of a company's internal controls.
Tests of controls may be performed in conjunction with the substantive procedures.

Substantive Procedures

Substantive procedures are designed to detect material misstatements in the financial statements.
Substantive procedures may be analytical or detailed.
Examples of substantive procedures include:
- Confirmations of receivables
- Physical inventory counts

Reliance on Experts

Auditors may rely on the work of experts to provide evidence on specific matters.
The auditor is not responsible for the expert’s findings.

Audit Evidence

Audit evidence is obtained to support the auditor’s opinion on the financial statements.
Audit evidence must be relevant and reliable.
The auditor must obtain sufficient appropriate audit evidence to form an opinion on the financial statements.

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Description

This quiz covers critical aspects of quality control in CPA firms, including human resources, monitoring, and engagement performance. It also delves into audit planning, risk components, and the significance of internal controls. Test your knowledge on these essential auditing concepts.