CFC Audit Coordination & Preparation 4 — Questions and Answers
Question 1: Which document summarizes management's understanding of the entity's key business processes and controls and is frequently used as a starting point for audit walkthroughs?
- Accounts payable aging report
- Process narrative or flow chart (Correct answer)
- Trial balance
- Chart of accounts
Correct answer: Process narrative or flow chart
Process narratives or flowcharts document how transactions are initiated, authorized, recorded, and reported, giving auditors a map for walkthrough testing.
Question 2: An external auditor requests a population of all journal entries above a certain threshold for testing. The controller should ensure the population includes which of the following?
- Only automated system-generated entries
- All entries including manual, recurring, and adjusting entries meeting the threshold (Correct answer)
- Entries posted by the CFO only
- Entries from the current period only, excluding prior-period adjustments
Correct answer: All entries including manual, recurring, and adjusting entries meeting the threshold
A complete population for journal entry testing includes all entry types—manual, automated, recurring, and adjusting—to address the fraud risk associated with improper entries.
Question 3: Which concept describes the auditor's responsibility to maintain an attitude of professional skepticism throughout the audit?
- Absolute assurance
- Due professional care with a questioning mind regardless of past client integrity (Correct answer)
- Reliance on management representations without corroboration
- Efficiency-first approach to minimize audit hours
Correct answer: Due professional care with a questioning mind regardless of past client integrity
Professional skepticism requires auditors to critically assess evidence and not assume management's honesty, even with clients who have a good track record.
Question 4: A controller is establishing a cut-off testing schedule for revenue. What period should be the MOST critical focus for year-end cut-off testing?
- The first week of the fiscal year
- Transactions occurring in the days immediately before and after the fiscal year-end (Correct answer)
- Mid-year transactions with the largest dollar values
- All transactions processed by the IT system automatically
Correct answer: Transactions occurring in the days immediately before and after the fiscal year-end
Cut-off testing focuses on transactions near the period-end to ensure revenue is recognized in the correct reporting period, as this is where misstatements are most likely.
Question 5: Under GAAS, what is the auditor's responsibility regarding related-party transactions identified during audit preparation?
- Ignore them if amounts are below materiality
- Obtain sufficient audit evidence to determine whether related-party transactions are properly disclosed and accounted for (Correct answer)
- Accept management's assertion that all related-party transactions are at arm's length
- Report them directly to the SEC without further testing
Correct answer: Obtain sufficient audit evidence to determine whether related-party transactions are properly disclosed and accounted for
AU-C Section 550 requires auditors to obtain sufficient evidence that related-party transactions are properly identified, authorized, and disclosed in the financial statements.
Question 6: What is the primary purpose of a closing conference held at the end of an external audit fieldwork?
- To sign the final audit opinion
- To communicate audit findings, proposed adjustments, and open items before the audit report is issued (Correct answer)
- To train management on new accounting standards
- To finalize the engagement letter for the next year
Correct answer: To communicate audit findings, proposed adjustments, and open items before the audit report is issued
The closing conference allows auditors to present findings and proposed adjustments, giving management the opportunity to respond before the final report is issued.
Question 7: Which risk is MOST directly addressed by requiring dual signatures on journal entries above a defined threshold?
- Liquidity risk
- The risk of unauthorized or fictitious journal entries (Correct answer)
- Foreign currency translation risk
- Inventory obsolescence risk
Correct answer: The risk of unauthorized or fictitious journal entries
Dual authorization on significant journal entries reduces the risk that a single individual could post fraudulent or erroneous entries without detection.
CFC Audit Coordination & Preparation 4
Which document summarizes management's understanding of the entity's key business processes and controls and is frequently used as a starting point for audit walkthroughs?