ch08 - Chapter 8 Multiple Choice 8-1. d 8-2. b 8-3. d 8-4....

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Chapter 8 Multiple Choice 8-1. d 8-2. b 8-3. d 8-4. c 8-5. a 8-6. c 8-7. b 8-8. d 8-9. a 8-10. b 8-11. c 8-12. a 8-13. b 8-14. a 8-15. b 8-16. c 8-17. b 8-18. d 8-19. b 8-20. d Discussion Questions 8-21 [LO 6] Assume that an auditor conducts an integrated audit in year one and issues a clean opinion on management’s assessment of internal control, internal control effectiveness and fairness of the financial statements. There is no change in the accounting information system. During the first quarter of year two the auditor identifies a control deficiency that has not yet caused a material misstatement in the financial records or statements, but could cause a material misstatement. What does this mean regarding the appropriateness of the auditor’s reports on ICFR in the prior year? Answer: It has no effect; since the accounting information system is unchanged, you can infer that the control deficiency does not relate to it and therefore has no bearing on the prior year’s report. 1
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8-22 [LO 7] If a company owns many business locations (for example, many store locations), and in the aggregate they could cause material misstatements to the financial statements, the auditor would need to obtain sufficient audit evidence for all the locations to conclude on ICFR effectiveness. Assume the stores do not share a standard accounting system, backroom operations and entity level controls are not uniform across locations. Is it possible that this situation could make the audit procedures that would need to be performed cost prohibitive – so that the company could not get an audit? Discuss. How might the company need to modify its procedures? Answer: AS #5 allows auditors to “dual test” both balances and internal controls. This is a significant method of reducing costs. As part of audit planning, the auditor would document the different accounting systems with the purpose being the integration of both substantive and internal control testing. Also, the auditor would assign weighting to the importance of one store versus another based on materiality, potentially limiting the testing needed at specific locations. The client could assist the audit by standardizing procedures at a minimum and implementing entity level controls. 8-23 [LO 1] Jessica Chatman is a staff auditor assigned the task of performing tests of internal controls for the JC Automotive Parts engagement. Before she begins testing, Jessica must first determine the timing of her tests. Because JC Automotive is a very small engagement, all controls are manual. In planning the tests, she identifies that one control is a significantly recurring control over the revenue account that occurs once a week (52 times a year). For another control, she identifies that the control is over adjusting entries and occurs quarterly (4 times a year). In planning the timing of the tests of the internal controls over financial reporting, which
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ch08 - Chapter 8 Multiple Choice 8-1. d 8-2. b 8-3. d 8-4....

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