CFC Audit Coordination & Preparation 3 — Questions and Answers
Question 1: Which type of audit evidence is generally considered MOST reliable according to auditing standards?
- Oral representations from management
- Documents generated internally by the client
- Evidence obtained directly by the auditor through external confirmation (Correct answer)
- Copies of documents provided by the client
Correct answer: Evidence obtained directly by the auditor through external confirmation
External confirmations obtained directly by the auditor from third parties (e.g., bank confirmations) are considered most reliable because they are independent of client control.
Question 2: A controller is preparing flux analysis for auditors. Which threshold is MOST commonly used to flag items for explanation?
- Any variance over $1
- Variances exceeding a defined percentage or dollar threshold relative to prior period or budget (Correct answer)
- Only variances on balance sheet accounts
- Variances that management considers immaterial
Correct answer: Variances exceeding a defined percentage or dollar threshold relative to prior period or budget
Flux analysis typically uses a combination of percentage and absolute dollar thresholds to identify accounts requiring explanation, ensuring proportionality across account sizes.
Question 3: Under SOX Section 404, management's assessment of internal controls over financial reporting must be based on which framework?
- Any internally developed control framework
- A recognized internal control framework such as COSO (Correct answer)
- ISO 9001 quality management standards
- FASB conceptual framework
Correct answer: A recognized internal control framework such as COSO
SEC rules require management to use a recognized framework, with COSO's Internal Control — Integrated Framework being the most widely accepted.
Question 4: What is the MAIN distinction between a significant deficiency and a material weakness in internal controls?
- Significant deficiencies must be reported to the SEC; material weaknesses need not be
- A material weakness represents a reasonable possibility of material misstatement; a significant deficiency is less severe (Correct answer)
- Significant deficiencies only apply to IT controls; material weaknesses apply to financial controls
- There is no practical distinction between the two terms
Correct answer: A material weakness represents a reasonable possibility of material misstatement; a significant deficiency is less severe
A material weakness creates a reasonable possibility that a material misstatement will not be prevented or detected, while a significant deficiency is a less severe control deficiency.
Question 5: Which audit coordination practice BEST reduces the risk of last-minute audit adjustments?
- Limiting auditor access to sensitive documents
- Conducting interim audit procedures during the fiscal year rather than only at year-end (Correct answer)
- Waiting until year-end close to provide all documentation
- Assigning a single employee to handle all auditor requests
Correct answer: Conducting interim audit procedures during the fiscal year rather than only at year-end
Interim audit procedures allow auditors to test controls and substantive transactions during the year, identifying issues early enough for timely remediation.
Question 6: A controller must provide auditors with a rollforward of accounts receivable. Which component is LEAST likely to be included?
- Beginning balance
- Collections received during the period
- Credit sales recorded during the period
- Depreciation expense for fixed assets (Correct answer)
Correct answer: Depreciation expense for fixed assets
Depreciation expense is related to fixed assets, not accounts receivable; an AR rollforward includes beginning balance, credit sales, collections, write-offs, and ending balance.
Question 7: When auditors issue a management letter (letter of recommendations), the financial controller's BEST response is to:
- Discard it as non-binding
- Provide a formal written response with remediation plans and target dates for each finding (Correct answer)
- Address only findings with direct financial statement impact
- Forward it to external legal counsel without internal action
Correct answer: Provide a formal written response with remediation plans and target dates for each finding
A formal written response with specific remediation plans and deadlines demonstrates accountability and provides a record of management's commitment to improving controls.
CFC Audit Coordination & Preparation 3
Which type of audit evidence is generally considered MOST reliable according to auditing standards?