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    Services, Professional Issues, GAAS, Materiality, Risk & Evidence

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    Answer briefly the following questions

    1. Define auditing, attest, and assurance services. Provide two examples of each type of service.

    2. What are the issues affecting the auditing profession?

    3. List the three categories of GAAS.

    4. Give three examples of qualitative factors that might affect the preliminary judgment about materiality.

    5. How do inherent risk and control risk differ from detection risk?

    6. List and define the seven types of audit evidence.

    7. What is an audit committee, and what are its responsibilities?

    8. What are some of the factors that affect the control environment?

    9. Distinguish between Type I and Type II errors.

    10.List the five categories of general controls. Why is segregation of duties important in an IT department?

    Select the correct answers for the following multiple choice questions

    (Post only the question No. and the letter of the answer. E.g. 12. a. )

    1. Which of the following is usually a benefit of transmitting transactions in an electronic data interchange (EDI) environment?
    a. A compressed business cycle with lower year-end receivables balances.
    b. A reduced need to test computer controls related to sales and collections transactions.
    c. An increased opportunity to apply statistical sampling techniques to account balances.
    d. No need to rely on third-party service providers to ensure security.

    2. Which of the following is typically not an attribute of an advanced IT system?
    a. Online, real-time processing.
    b. No visual audit trail.
    c. Interaction between accounting and operating cycles.
    d. PCs connected to a network.

    3. An auditor would most likely be concerned with which of the following controls in a distributed data processing system?
    a. Hardware controls.
    b. Systems acquisition, development, and maintenance controls.
    c. Access controls.
    d. Disaster recovery controls.

    4. Errors in data processed in a batch computer system may not be detected immediately because
    a. Transaction trails in a batch system are available for only a limited period of time.
    b. There are time delays in processing transactions in a batch system.
    c. Errors in some transactions cause rejection of other transactions in the batch.
    d. Random errors are more likely in a batch system than in an online system.

    5. Which of the following most likely represents a weakness in internal control of an IT system?
    a. The systems analyst reviews output and controls the distribution of output from the IT department.
    b. The accounts payable clerk prepares data for computer processing and enters the data into the computer.
    c. The systems programmer designs the operating and control functions of programs and participates in testing operating systems.
    d. The control clerk establishes control over data received by the IT department and reconciles control totals after processing.

    6. An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus?
    a. Data capture controls.
    b. Application controls.
    c. Output controls.
    d. General controls.

    7. a Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system?
    a. Continuous monitoring and analysis of transaction processing with an embedded audit module.
    b. Increased reliance on internal control activities that emphasize the segregation of duties.
    c. Verification of encrypted digital certificates used to monitor the authorization of transactions.
    d. Extensive testing of firewall boundaries that restrict the recording of outside network traffic.

    8. a To obtain evidence that user identification and password controls are functioning as designed, an auditor would most likely
    a. Attempt to sign on to the system using invalid user identifications and passwords.
    b. Write a computer program that simulates the logic of the client's access control software.
    c. Extract a random sample of processed transactions and ensure that the transactions were appropriately authorized.
    d. Examine statements signed by employees stating that they have not divulged their user identifications and passwords to any other person.

    9. A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses an IT system is that the auditor may
    a. Consider increasing the use of substantive tests of transactions in place of analytical procedures.
    b. Substantiate the accuracy of data through self-checking digits and hash totals.
    c. Reduce the level of required tests of controls to a relatively small amount.
    d. Access information stored on computer files while having a limited
    understanding of the client's hardware and software features.

    10.Which of the following statements is not true of the test data approach to testing an accounting system?
    a. The test data are processed by the client's computer programs under the auditor's control.
    b. The test data need consist of only those valid and invalid conditions that interest the auditor.
    c. Only one transaction of each type need be tested.
    d. The test data must consist of all possible valid and invalid conditions.

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    Solution Preview


    1. Define auditing, attest, and assurance services. Provide two examples of each type of service.
    Auditing is the evaluation of anything of interest such as a person, an organization, a system or even a process, a project and even a product. Two examples are financial audit which evaluates whether a set of financial statements are presented fairly according to an agreed upon standards, and quality audits which evaluate the effectiveness of a quality management system.
    An attestation service is a service provided by a certified public accountant which expresses an opinion on the reliability of a written report or statement prepaid by a third party. Examples are financial audit and ISO 9000 compliances.
    Assurance services are services provided by a CPA as to the correctness or appropriateness of information. Examples are comprehensive risk assessments and business performance measurement.

    2. What are the issues affecting the auditing profession?
    Issues affecting the auditing profession include:
    ? Increasing computerization of accounting data and information which makes auditing more complex
    ? Increasing complexity of business transactions particularly those that cross geographic and political borders
    ? Increase in government regulations on the profession as a result of lapses (e.g. SOX)

    3. List the three categories of GAAS.
    1. General standards
    2. Standards of field work
    3. Standards of reporting

    4. Give three examples of qualitative factors that might affect the preliminary judgment about materiality.
    1. Fraud
    2. Minor misstatements with impact on contractual obligations
    3. Minor misstatements that affect the trend in earnings

    5. How do inherent risk and control risk differ from detection risk?
    Inherent risk is the auditor's assessment of the likelihood that there are material misstatements in an account before ...

    Solution Summary

    The expert defines auditing, attest, and assurance services. The issues affecting the auditing professions is determined.