What is the auditor’s responsibility for obtaining an understanding of internal control? How does that responsibility differ for audits of public and nonpublic companies?
12-2 (OBJECTIVE 12-1) Jeanne Maier, CPA, believes that it is appropriate to obtain an understanding of internal control about halfway through the audit, after she is familiar with the client’s operations and the way the system actually works. She has found through experience that filling out internal control questionnaires and flowcharts early in the engagement is not beneficial because the system rarely functions the way it is supposed to. Later in the engagement, the auditor can prepare flowcharts and questionnaires with relative ease because of the knowledge already obtained on the audit. Evaluate her approach.
12-3 (OBJECTIVE 12-1) What is a walkthrough of internal control? What is its purpose?
12-4 (OBJECTIVE 12-2) Describe how the nature of evidence used to evaluate the control environment differs from the nature of evidence used to evaluate control activities.
12-5 (OBJECTIVES 12-2, 12-5) Distinguish a significant deficiency in internal control from a material weakness in internal control. How will the presence of one significant deficiency affect an auditor’s report on internal control under PCAOB standards? How will the presence of one material weakness affect an auditor’s report on internal control under PCAOB standards?
12-6 (OBJECTIVES 12-3, 12-6) Distinguish the auditor’s responsibility for testing controls in an integrated audit of a public company from the responsibility to test controls in an audit of a nonpublic company.
12-7 (OBJECTIVE 12-3) During the prior-year audits of McKimmon, Inc., a private company, the auditor did tests of controls for all relevant financial statement assertions. Some of the related controls are manual while others are automated. Describe the extent to which the auditor can rely on tests of controls performed in prior years.
12-8 (OBJECTIVES 12-2, 12-3) The auditor’s risk assessment procedures identified several risks that the auditor deems to be significant risks. Several internal controls exist that are designed to mitigate the risks identified. Describe the auditor’s responsibilities for considering those controls in the current audit.
12-9 (OBJECTIVE 12-3) Your client has outsourced the majority of the accounting information system to a third-party data center. What impact does that have on your audit of the financial statements?
12-10 (OBJECTIVE 12-4) How does the auditor use information obtained from the control risk assessment and testing of controls to plan audit procedures?
12-11 (OBJECTIVE 12-4) If the auditor assesses control risk as high for a transaction-related audit objective, what does that imply for detection risk and the level of substantive testing?
12-12 (OBJECTIVE 12-5) What two conditions must be present for the auditor to issue an unqualified opinion on internal control over financial reporting? What type of condition will cause the auditor to issue a qualified or disclaimer of opinion on internal control over financial reporting?
12-13 (OBJECTIVE 12-6) Explain how control risk assessment differs for an integrated audit versus a financial statement-only audit.
12-14 (OBJECTIVE 12-7) Explain what is meant by auditing through the computer, and describe the challenges and benefits of this approach in an audit of a client that uses IT extensively to process accounting information.
12-15 (OBJECTIVE 12-7) Explain what is meant by the test data approach. What are the major difficulties with using this approach? Define parallel simulation with audit software and provide an example of how it can be used to test a client’s payroll system.
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