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Which of the following characteristics distinguishes computer processing from manual processing?
Answer : A
Choice 'a' is correct. Computer processing virtually eliminates the occurrence of (random) computational errors normally associated with manual processing. This is a major benefit of computer processing over manual processing.
Choice 'b' is incorrect. Depending on human involvement and review, errors or irregularities in computer processing may not be detected quickly.
Choice 'c' is incorrect. The potential for systematic errors (e.g., incorrect programming, incorrect data entry) is greater in a computerized system due to reduced human involvement in processing.
Choice 'd' is incorrect. Only poorly designed computerized systems provide no audit trail capabilities.
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:
Answer : B
Choice 'b' is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because there is more than a remote likelihood that they will result in a financial statement misstatement that is more than inconsequential.
Choice 'a' is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion).
Choice 'c' is incorrect. Significant deficiencies do not necessarily involve violations of an entity's conflictof-interest policies.
Choice 'd' is incorrect. Interfering with the auditor's procedures would not constitute a significant deficiency, since such interference would not affect the financial statements.
An auditor's communication of internal control related matters noted in an audit usually should be addressed to:
Answer : A
Choice 'a' is correct. An auditor's communication of internal control related matters noted in an audit usually should be addressed to management and those charged with governance.
Choices 'b', 'c', and 'd' are incorrect. The director of internal auditing, the chief financial officer, and the chief accounting officer all would have access to the letter; however, it would not be addressed to them since they do not have the same level of authority and responsibility to the shareholders as management and those charged with governance.
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:
Answer : D
Choice 'd' is correct. When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements, the auditor should include a restriction on the use of the report.
Choice 'a' is incorrect. The auditor would not include a description of tests performed to search for material weaknesses since the auditor is not in fact obligated to search for them.
Choices 'b' and 'c' are incorrect. An auditor would make a statement of positive assurance on internal control and include a paragraph describing the inherent limitations of internal control in conjunction with an engagement to report on internal control. These comments would not be made when reporting on an entity's internal control in conjunction with an audit of the financial statements of a nonissuer.
An engagement to express an opinion on the internal control of a nonissuer will generally:
Answer : C
Choice 'c' is correct. An engagement to express an opinion on internal control will generally be more extensive in scope than the assessment of control risk made during a financial statement audit of a nonissuer. This occurs because assessing control risk is the primary purpose of an engagement to express an opinion on internal control, whereas it is an incidental result of an audit of a nonissuer.
Choice 'a' is incorrect. Since the results of the audit may be considered in performing the engagement to express an opinion on internal control, it is unlikely that the auditor would duplicate those procedures already applied.
Choice 'b' is incorrect. It is unlikely that the reliability of the financial statements that have already been audited would be increased if an engagement to express an opinion on internal control is performed.
Choice 'd' is incorrect. An engagement to express an opinion on internal control is more extensive in scope than the control risk assessment performed during an audit of a nonissuer.
