Question Details

QUIZ
Which
 of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency?
I.	The likelihood that a control will fail to prevent or detect a misstatement.
II.	The magnitude of the misstatement that could result from the deficiency.
 
a.	Both I and II.
 
b.	II only.
 
c.	I only.
 
d.	Neither I nor II.
Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?
 
a.	An auditor may report that no significant deficiencies were noted during an audit.
 
b.	All significant deficiencies are also considered to be material weaknesses.
 
c.	An auditor is required to search for significant deficiencies during an audit.
 
d.	An auditor may communicate significant deficiencies during an audit or after the audit's completion.
Explanation
Choice "d" is correct. Because timely communication may be important, the auditor may choose 
An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should:
 
a.	Indicate that the significant deficiencies should be disclosed in the annual report to the entity's shareholders.
 
b.	Indicate that the audit's purpose was to report on the financial statements and not to provide an opinion on internal control.
 
c.	Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses.
 
d.	Include a paragraph describing management's assertion concerning the effectiveness of internal control.
In reporting on a nonissuer's internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the:
 
a.	Potential benefits from the practitioner's suggested improvements.
 
b.	Inherent limitations of any internal control.
 
c.	Documentary evidence regarding the control environment factors.
 
d.	Changes in internal control since the prior report.
Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on a nonissuer's internal control over financial reporting?
 
a.	Management agrees not to present the practitioner's report in a general-use document to stockholders.
 
b.	The practitioner is a continuing auditor who previously has audited the entity's financial statements.
 
c.	The practitioner anticipates relying on the entity's internal control in a financial statement audit.
 
d.	Management presents its written assertion about the effectiveness of internal control.
Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during a financial statement audit of a nonissuer?
 
a.	A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation.
 
b.	An auditor should perform tests of controls on significant deficiencies before communicating them to the client.
 
c.	An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.
 
d.	An auditor's report on significant deficiencies should include a restriction on the distribution of the report.
Snow, CPA, was engaged by Master Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of Master's internal control over financial reporting. Snow's report should state that:
 
a.	Management's assertion is based on criteria established by the American Institute of Certified Public Accountants.
 
b.	Because of its inherent limitations, internal control may not prevent, or detect and correct misstatements.
 
c.	The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.
 
d.	The results of Snow's tests of controls will form the basis for Snow's opinion on the fairness of Master's financial statements in conformity with GAAP.
Which of the following best describes a CPA's engagement to report on a nonissuer's internal control over financial reporting?
 
a.	A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefits of the entity's internal control.
 
b.	An attestation engagement to examine and report on management's written assertion about the effectiveness of its internal control.
 
c.	A consulting engagement to provide constructive advice to the entity on its internal control.
 
d.	A review engagement to render limited assurance on the entity's internal control.
When communicating internal control related matters noted in an audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that:
 
a.	The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
 
b.	Errors or fraud may occur and not be detected because there are inherent limitations in any internal control.
 
c.	A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions.
 
d.	The issuance of an unmodified opinion on the financial statements may be dependent on corrective follow-up action.
A letter issued on significant deficiencies relating to an entity's internal control observed during an audit of the financial statements of a nonissuer should include a:
 
a.	Restriction on the use of the report. 
 
b.	Statement of compliance with applicable laws and regulations.
 
c.	Paragraph describing management's evaluation of the effectiveness of internal control.
 
d.	Description of tests performed to search for material weaknesses.
standards in her audit of Bender Industries. She has also been asked to conduct the Kleinpeter audit in accordance with both generally accepted auditing standards and the auditing standards of the PCAOB. Regarding the McCormick engagement, Hannah has decided to follow only generally accepted auditing standards, and not the standards of the PCAOB. Which of the following best describes the scope of Hannah's work related to internal control in these three engagements?
 
a.	Hannah must express an opinion on the effectiveness of internal control in both the Bender and Kleinpeter engagements, but is not required to express such an opinion in the McCormick engagement.
 
b.	Hannah must express an opinion on the effectiveness of internal control in the Bender engagement, but is not required to express such an opinion in the Kleinpeter and McCormick engagements.
 
c.	Hannah is not required to express an opinion on the effectiveness of internal control in any of the three engagements, since she was hired to perform a financial statement audit and not to report on internal control.
 
d.	Hannah must express an opinion on the effectiveness of internal control in all three engagements.
Which of the following is true regarding significant deficiencies in internal control?
 
a.	They must be included in the financial statements.
 
b.	Auditors must communicate them to management and to those charged with governance.
 
c.	They must be disclosed in footnotes.
 
d.	Auditors must search for them.
Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this engagement?
 
a.	It is required by generally accepted auditing standards.
 
b.	It is only required if Eva Industries elects to have an audit in accordance with PCAOB standards.
 
c.	Eva's management must provide a written report to accompany Henna and Company's report.
 
d.	It is required by PCAOB standards.
standards. 
A control deficiency would be considered a material weakness when the likelihood that potential financial statement misstatements will not be prevented, or detected/corrected, and the magnitude of such misstatements are at a minimum:
		Likelihood	Magnitude
 
a.	Reasonable	Material
 
b.	Probable	More than inconsequential
 
c.	Reasonable	More than inconsequential
 
d.	Probable	Material
In an audit of an issuer, the auditor must provide an opinion on which of the following?
I.	The financial statements.
II.	The audit committee's oversight of financial reporting and internal control.
III.	The effectiveness of internal control.
 
a.	I and II only.
 
b.	I only.
 
c.	I, II, and III.
 
d.	I and III only.
Explanation
Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?
 
a.	Neither significant deficiencies nor material weaknesses are required to be communicated.
 
b.	The auditor must communicate significant deficiencies, but need not separately identify material weaknesses.
 
c.	The auditor must communicate material weaknesses, but need not disclose significant deficiencies.
 
d.	The auditor must communicate both significant deficiencies and material weaknesses.
Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer?
		Must be Communicated to Management
and the Audit Committee	Results in an Adverse Opinion of the
Effectiveness of Internal Control
 
a.	Both significant deficiencies and
material weaknesses	Both significant deficiencies and
material weaknesses
 
b.	Both significant deficiencies and
material weaknesses	Material weaknesses but not 
significant deficiencies
 
c.	Material weaknesses but not
significant deficiencies	Both significant deficiencies and
material weaknesses
 
d.	Material weaknesses but not
significant deficiencies	Material weaknesses but not
significant deficiencies
Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?
 
a.	The auditor must communicate material weaknesses, but need not disclose significant deficiencies.
 
b.	The auditor must communicate both significant deficiencies and material weaknesses.
 
c.	The auditor must communicate significant deficiencies, but need not separately identify material weaknesses.
 
d.	Neither significant deficiencies nor material weaknesses are required to be communicated.
In a financial statement audit of a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:
 
a.	Only if the deficiency is considered a material weakness.
 
b.	Only if the deficiency has a material effect on the auditor's assessment of control risk.
 
c.	Unless the entity accepts that degree of risk because of cost-benefit considerations.
 
d.	In writing, during the current audit.
 
c.
The auditor need not search for significant deficiencies in internal control unless management requests an attestation that "no significant deficiencies in internal control were noted in the audit."
 
d.
The auditor should search for significant deficiencies in internal control if the auditor expects that controls are operating effectively (i.e., if the auditor plans to rely on controls).
Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control in a financial statement audit of a nonissuer?
 
a.	The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.
 
b.	The auditor should design and apply tests of controls to discover significant deficiencies in internal control that could result in material misstatements.
Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?
 
a.	Jackson is not required to audit internal control, but should report any significant deficiencies or material weaknesses noted.
 
b.	Jackson is required to audit and report on Saffer- internal control.
 
c.	Saffer is required to obtain an audit of its internal control, but a professional other than Jackson may be hired for this purpose.
 
d.	If Jackson provides an adverse opinion on the financial statements, an audit of Saffer- internal control is not permitted.
Which of the following best describes an auditor- responsibility with respect to communicating internal control deficiencies of issuers?
 
a.	The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.
 
b.	The auditor is not required to communicate control deficiencies to management or the audit committee unless they constitute a significant deficiency or a material weakness.
 
c.	The auditor is required to communicate all deficiencies in internal control to management, deficiencies that constitute a significant deficiency to the audit committee, and deficiencies that constitute a material weakness to the full board of directors.
 
d.	The auditor is not required to communicate control deficiencies or significant deficiencies to management or the audit committee, but must communicate material weaknesses to both management and the audit committee.
In which case might an auditor of an issuer render a qualified opinion on internal control?
I.	When there is a scope limitation.
II.	When there is a material weakness in internal control.
 
a.	Both I and II.
 
b.	II only.
 
c.	I only.
 
d.	Neither I nor II.
Gail is auditing the financial statements of Hoefener Home Improvements, a publicly held company. Gail notes several deficiencies in internal control, and is trying to determine whether each deficiency constitutes a significant deficiency or a material weakness. Which best describes the framework Gail should use in making this evaluation?
 
a.	A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is more than a remote chance of a material misstatement.
 
b.	A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is more than a remote chance of a material misstatement.
 
c.	A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement.
 
d.	A significant deficiency exists when there is more than a remote chance of a more than inconsequential misstatement, and a material weakness exists when there is a reasonable possibility of material misstatement.
Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?
 
a.	Make inquiries to understand the potential consequence of the deviation.
 
b.	Increase sample size of tests of controls.
 
c.	Assume that the deviation is an isolated occurrence without audit significance.
 
d.	Report the matter to the next higher level of authority within the entity.
Which of the following statements is correct regarding internal control?
 
a.	An inherent limitation to internal control is the fact that controls can be circumvented by management override.
 
b.	Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.
 
c.	A well-designed internal control environment ensures the achievement of an entity's control objectives.
 
d.	A well-designed and operated internal control environment should detect collusion perpetrated by two people.
to:
 
a.	Determine whether the control activities relevant to audit planning have been implemented.
 
b.	Perform procedures to understand the design of internal control.
 
c.	Search for all significant deficiencies in the operation of internal control.
 
d.	Understand the internal control environment and the accounting system.
With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:
 
a.	Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company's financial reporting.
 
b.	Material irregularities or illegal acts perpetrated by high-level management.
 
c.	Manipulation or falsification of accounting records or documents from which financial statements are prepared.
 
d.	Disclosures of information that significantly contradict the auditor's going concern assumption.
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 are important enough to merit attention by those responsible for oversight of the company's financial reporting.
 
c.	Intentional attempts by client personnel to limit the scope of the auditor's fieldwork.
 
d.	Flagrant violations of the entity's documented conflict-of-interest policies.
When engaged to express an opinion on a nonissuer's internal control, an accountant should:
 
a.	Qualify any opinion concerning management's assertion that the cost of correcting any weaknesses exceeds the benefits.
 
b.	Obtain management's written assertions regarding whether the company has maintained effective internal control.
 
c.	Disclaim an opinion on whether the system taken as a whole is sufficient to prevent or detect material errors or irregularities.
 
d.	Keep informed of events subsequent to the date of the report that might have affected the accountant's opinion.
Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?
 
a.	An auditor should report immediately material weaknesses and significant deficiencies discovered during an audit.
 
b.	An auditor need not identify and communicate material weaknesses separately from significant deficiencies.
 
c.	All significant deficiencies are material weaknesses.
 
d.	All material weaknesses are significant deficiencies.
The management of Cain Company, a nonissuer, engaged Bell, CPA, to express an opinion on Cain'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.	Advise both management and the Board that Bell was withdrawing the opinion.
 
b.	Disclaim an opinion as to management's cost-benefit statement.
 
c.	Advise management that Bell's report was restricted for use only by management.
 
d.	Advise the Board that Bell either agrees or disagrees with management's statement.
An auditor's communication of internal control related matters noted in an audit usually should be addressed to:
 
a.	Management and those charged with governance.
 
b.	The chief financial officer.
 
c.	The chief accounting officer.
 
d.	The director of internal auditing.
Explanation
When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements of a nonissuer, the auditor should include a:
 
a.	Statement of positive assurance on internal control.
 
b.	Paragraph describing the inherent limitations of internal control.
 
c.	Restriction on the use of the report.
 
d.	Description of tests performed to search for material weaknesses.
An engagement to express an opinion on the internal control of a nonissuer will generally:
 
a.	Be more extensive in scope than the assessment of control risk made during a financial statement audit.
 
b.	Increase the reliability of the financial statements that are being audited.
 
c.	Be more limited in scope than the assessment of control risk made during a financial statement audit.
 
d.	Require procedures that duplicate those already applied in assessing control risk during a financial statement audit.
Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?
 
a.	The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.
 
b.	The auditor is obligated to search for significant deficiencies that could adversely affect the entity's ability to record and report financial data.
 
c.	Significant deficiencies should not be re-communicated each year if management has acknowledged its understanding of such deficiencies.
 
d.	Significant deficiencies are material weaknesses in the design or operation of specific internal control components.
year, even if management has acknowledged its understanding of such deficiencies. 
Which of the following statements concerning an auditor's communication of significant deficiencies identified during the audit of a nonissuer is correct?
 
a.	The auditor should request a meeting with management one level above the source of the significant deficiencies to discuss suggestions for remedial action.
 
b.	Suggestions concerning administration efficiencies and business strategies should not be communicated in the same report with significant deficiencies.
 
c.	Significant deficiencies discovered and communicated at an interim date should be reexamined with tests of controls before completing the engagement.
 
d.	Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.
Which of the following representations should not be included in a report on internal control related matters noted in an audit of a nonissuer?
 
a.	There are no significant deficiencies in the design or operation of internal control.
 
b.	The auditor's consideration of internal control would not necessarily disclose all significant deficiencies that exist.
 
c.	Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit.
 
d.	Significant deficiencies related to internal control design exist, but there are no material weaknesses.
Which is true regarding PCAOB standards surrounding internal control?
 
a.	All auditors must follow PCAOB standards surrounding internal control.
 
b.	PCAOB standards surrounding internal control apply only to audits of issuers.
 
c.	PCAOB standards surrounding internal control apply only to audits of nonissuers.
 
d.	The PCAOB has not issued standards surrounding internal control.
Explanation
An auditor has been hired to report on a nonissuer's internal control over financial reporting. Which of the following best describes a reporting option in this scenario?
 
a.	If management fails to provide a written representation letter acknowledging its responsibility for the effectiveness of internal control, the auditor may issue either a qualified opinion or an adverse opinion.
 
b.	When a significant deficiency exists, the auditor may issue either a qualified or adverse opinion.
 
c.	When a material weakness exists, the auditor should issue an adverse opinion.
 
d.	If management fails to provide a written representation letter acknowledging its responsibility for the effectiveness of internal control, the auditor will generally issue an unmodified opinion with additional explanatory language.
auditor is not obligated to:
 
a.	Perform procedures to understand the design of internal control.
 
b.	Determine whether the control activities have been implemented.
 
c.	Document the understanding of the entity's internal control components.
 
d.	Search for significant deficiencies in the operation of internal control.
Explanation
Choice "d" is correct. When obtaining an understanding of an entity's internal control in a 
Which of the following is not true about significant deficiencies in internal control?
 
a.	The auditor is required to communicate to management and those charged with governance all significant deficiencies in internal control that he or she observes during the audit.
 
b.	All material weaknesses in internal control are also significant deficiencies.
 
c.	The auditor is required to search for significant deficiencies in internal control.
 
d.	The auditor should not indicate to management that no significant deficiencies in internal control were noted during the audit.
Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?
 
a.	Management's failure to renegotiate unfavorable long-term purchase commitments.
 
b.	Management's current plans to reduce its ownership equity in the entity.
 
c.	Recurring operating losses that may indicate going concern problems.
 
d.	Evidence of a lack of objectivity by those responsible for accounting decisions.
In reporting on a nonissuer's internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the:
 
a.	Potential benefits from the practitioner's suggested improvements.
 
b.	Inherent limitations of any internal control.
 
c.	Documentary evidence regarding the control environment factors.
 
d.	Changes in internal control since the prior report.
Explanation
In an audit of an issuer:
I.	Management must assess and report on internal control.
II.	The auditor must assess and report on internal control.
 
a.	Both I and II.
 
b.	Either I or II.
 
c.	I only.
 
d.	II only.
Explanation
How do the scope, procedures, and purpose of tests of controls in an examination of the internal control of a nonissuer compare to those for obtaining an understanding of internal control and assessing control risk as part of a financial statement audit of a nonissuer?
		Scope	Procedures	Purpose
 
a.	Similar	Different	Similar
 
b.	Different	Similar	Similar
 
c.	Different	Similar	Different
 
d.	Different	Different	Different
Which of the following circumstances would be inappropriate for the auditor to communicate to those charged with governance?
 
a.	Management has consulted with other accountants about accounting and auditing matters during the period under audit.
 
b.	A material misstatement was noted by the auditor and corrected by management.
 
c.	The auditor is requesting representations regarding the financial statements from management.
 
d.	No significant deficiencies in internal control exist that would affect the financial statements.
Explanation