AUD Practice Questions

The most effective procedures directly address the high-risk estimate. Physical observation corroborates the percentage complete. Using an auditor's specialist directly challenges the complex cost-to-complete estimate. Vouching costs incurred validates the 'numerator' in the percentage-of-completion calculation. Relying on management representations or high-level analytics would be inappropriate given the significant risk and weak controls.

The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB) and gave it the authority to set auditing standards for audits of public companies (issuers). The AICPA's Auditing Standards Board (ASB) sets standards for audits of non-public companies (non-issuers).

If an auditor tests controls at an interim date, they must obtain additional evidence for the remaining period. If significant changes have occurred, the auditor cannot rely on the interim testing and must test the new control or determine that the control is no longer effective, which would require a modification to the planned substantive procedures.

Poorly organized records and missing documents create a risk that the auditor's procedures will not detect a material misstatement that exists. This is the definition of detection risk. While it also suggests high control risk (the controls over record-keeping are weak), the most direct impact is on the auditor's ability to gather sufficient appropriate evidence, which is managed by adjusting the nature, timing, and extent of procedures to lower detection risk.

Before accepting an engagement, the successor auditor is required to initiate contact with the predecessor auditor (after obtaining client permission). The primary purpose of this communication is to inquire about matters that may bear on the decision to accept the engagement, such as the integrity of management, disagreements about accounting principles, and the predecessor's understanding of the reason for the change in auditors.

When a material uncertainty exists and management has provided adequate disclosure, the auditor's opinion is not modified. Instead, the auditor should include an emphasis-of-matter paragraph in the report to draw users' attention to the matter, as it is fundamental to their understanding of the financial statements. A qualified opinion is inappropriate because the financial statements are not materially misstated. An adverse opinion is for pervasively misstated financials. A disclaimer is for a lack of sufficient evidence.

The sample deviation rate is 4% (4 deviations / 100 samples). The auditor must also consider the allowance for sampling risk. The computed upper deviation rate is the sample deviation rate plus the allowance for sampling risk. Given the parameters, finding 4 deviations will result in an upper deviation rate that exceeds the tolerable rate of 6%. Therefore, the auditor would conclude that the control is not effective and cannot be relied upon to the extent planned, necessitating an increase in the assessed level of control risk and an expansion of substantive testing.

A SOC 1 report focuses on internal controls over financial reporting. A Type 1 report only opines on the suitability of the design of controls at a specific point in time. A Type 2 report opines on both the design and the operating effectiveness of the controls throughout a specified period. Therefore, only a SOC 1, Type 2 report provides assurance on operating effectiveness over time. SOC 2 reports relate to Trust Services Criteria (security, availability, etc.), which may be relevant but are not the primary report for controls over financial reporting.

Entries made by unusual users or at unusual times are classic indicators of management override or attempts to circumvent normal control processes. Filtering for round-dollar amounts or amounts just below an approval threshold are also effective. Ensuring debits equal credits is a basic system function and not an indicator of override.

A material weakness in internal control relates to the control system, not necessarily the financial statements themselves. If the auditor can perform sufficient substantive procedures to confirm that the financial statements are not materially misstated despite the control weakness, an unmodified opinion on the financial statements can still be issued. The material weakness must be communicated in writing to management and those charged with governance.