Ch 13 Overall Audit Strategy and Audit Program

Which of the following audit tests is usually the least costly to perform? A) Analytical procedures B) Tests of controls C) Tests of balances D) Substantive tests of transactions

A) Analytical procedures

When controls are deemed ineffective and assessed control risk is at the maximum for a private company, which of the following would normally be true? A) No emphasis is placed on the controls. B) Relatively little emphasis is placed on the controls. C) Moderate emphasis is placed on the controls. D) Heavy emphasis is placed on the controls.

A) No emphasis is placed on the controls.

Which of the following tests commonly occur together? A) Substantive tests of transactions and tests of controls B) Substantive tests of transactions and obtaining an understanding of internal controls C) Analytical procedures and tests of controls D) Tests of controls and tests of details of balances

A) Substantive tests of transactions and tests of controls

Which of the following is true? A) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts. B) Tests of details of balances focus on the transactions during the period for both balance sheet and income statement accounts. C) Tests of details of balances focus on the auditor's understanding of internal controls. D) Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the auditor.

A) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts.

Which of the following is not a valid basis for omitting an audit test in forming an opinion on the clients financial statements? A) The difficulty and expense involved in testing a particular item B) The relative risk involved C) The degree of reliance on the relevant internal controls D) The relationship between the cost of obtaining evidence and its usefulness

A) The difficulty and expense involved in testing a particular item

Tests of controls and substantive tests of transactions are an important determinant of the extent of the auditor's use of tests of details of balances. Which of the following is true? A) They are likely to be performed prior to the clients end of the fiscal year. B) They are likely to eliminate the need for tests of details of balances. C) They are likely to have no impact on the planned tests of details of balances. D) They are likely to be used only in the audit of internal control.

A) They are likely to be performed prior to the clients end of the fiscal year.

A major part of the auditor's risk assessment procedures is done to obtain an understanding of internal control. A) True B) False

A) True

An exception in a test of control provides only an indication of the likelihood of monetary misstatements in the financial statements because tests of controls do not reveal whether monetary misstatements have actually occurred. A) True B) False

A) True

Analytical procedures are normally designed at the account level, whereas tests of controls and substantive tests of transactions are normally designed at the transaction-related objective level. A) True B) False

A) True

Auditors use analytical procedures and tests of details of balances to satisfy planned detection risk. A) True B) False

A) True

Only tests of details of balances involve physical examination and confirmation. A) True B) False

A) True

Substantive tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances. A) True B) False

A) True

Substantive tests of transactions and control tests are often conducted simultaneously. A) True B) False

A) True

The auditor's understanding of internal control performed as part of risk assessment procedures provides the basis for the auditor's initial assessment of control risk. A) True B) False

A) True

The primary emphasis in most tests of details of balances is on the: A) balance sheet accounts. B) revenue accounts. C) cash flow statement accounts. D) expense accounts.

A) balance sheet accounts.

Risk assessment procedures are performed by auditors during an audit in order to: A) determine the risk of material misstatement in the financial statements. B) determine the amount of testing of internal control. C) determine the extent of testing of details of balances. D) determine the extent of testing of transactions.

A) determine the risk of material misstatement in the financial statements.

If no material differences are found using analytical procedures and the auditor concludes that misstatements are not likely to have occurred: A) other substantive tests may be reduced. B) it will be necessary to increase the tests of balances. C) it will not be necessary to perform tests of balances. D) it will be necessary to increase the tests of transactions

A) other substantive tests may be reduced.

If tests of controls support the control risk assessment, then ________ in the audit risk model is increased. A) planned detection risk. B) planned inherent risk. C) planned fraud risk. D) planned assurance risk.

A) planned detection risk.

Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests? 1. Risk assessment procedures 2. Tests of controls 3. Tests of transactions 4. Substantive analytical procedures 5. Tests of details of balances A) 1, 2, and 3. B) 3, 4, and 5. C) 2, 3, and 5. D) 2, 3, and 4.

B) 3, 4, and 5.

The auditor would design which of the following audit tests to detect possible monetary errors in the financial statements? A) Control tests B) Analytical procedures C) Risk assessment procedures D) Tests of operating effectiveness of controls over revenue and cash

B) Analytical procedures

Which of the following types of evidence is not available when using substantive tests of transactions? A) Inspection B) Confirmation C) Inquiries of the client D) Reperformance

B) Confirmation

When the auditor has completed the tests of details of balances and enters phase 4 of the audit process, she must still perform audit procedures for which of the following? A) Contingent liabilities and employee compensation B) Contingent liabilities and subsequent events C) Subsequent events and contractual commitments D) Subsequent events and unrecorded liabilities

B) Contingent liabilities and subsequent events

Auditors must perform tests of controls separately from substantive tests of transactions. A) True B) False

B) False

Because of the high cost of tests of details of balances, auditors do not perform this type of testing unless fraud is suspected. A) True B) False

B) False

If all transaction-related audit objectives are met, the auditor does not need to perform substantive tests of balances to determine realizable value. A) True B) False

B) False

If inherent risk is increased to medium from low, tests of details of balances can be reduced. A) True B) False

B) False

Procedures to obtain an understanding of internal control generally provide sufficient appropriate evidence that a a control is operating effectively. A) True B) False

B) False

Tests of controls are performed to support a reduced assessment of detection risk. A) True B) False

B) False

Tests of controls should be performed after substantive tests of transactions. A) True B) False

B) False

The auditor must communicate significant deficiencies in internal control only after the entire audit is complete to ensure the auditor has a sufficient understanding of the circumstances surrounding the deficiency. A) True B) False

B) False

The extent of tests of details of balances cannot be reduced when transaction-related audit objectives have been satisfied by tests of controls or substantive tests of transactions. A) True B) False

B) False

When testing details of balances, most audit procedures satisfy only one balance-related objective, but more than one audit procedure should be used to test each objective. A) True B) False

B) False

Auditors follow a four step approach to reduce assessed control risk. Which of the following is not one of the four? A) Apply transaction related audit objectives to a class of transactions. B) Identify accounts that have high inherent risk. C) Identify key controls that reduce control risk. D) For potential misstatements, design appropriate substantive tests of transactions.

B) Identify accounts that have high inherent risk.

Transaction related audit objectives would most likely be performed in which phase of the audit process? A) Plan and design audit approach B) Perform audit tests for controls and transactions C) Perform analytical procedures and tests of balances D) Complete the audit and issue the audit report

B) Perform audit tests for controls and transactions

Which of the following statements is not true? A) Analytical procedures emphasize the overall reasonableness of transactions and balances. B) Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk and thereby reducing analytical review procedures. C) Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger. D) Tests of details of balances emphasize the ending balances in the general ledger.

B) Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk and thereby reducing analytical review procedures.

Which of the following audit tests would be regarded as a test of controls? A) Comparison of the inventory pricing to vendors' invoices B) Tests of the signatures on canceled checks to board of directors' authorizations C) Tests of the additions to property, plant, and equipment by physical inspections D) Review of the specific items making up the balance in a given general ledger account

B) Tests of the signatures on canceled checks to board of directors' authorizations

Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? A) The audit program B) The auditor's judgment C) Generally accepted auditing standards D) The auditor's working papers

B) The auditor's judgment

A deficiency uncovered in the audit of internal control is explained by which of the following in relation to a financial statement misstatement? A) The amount of the misstatement B) The likelihood of the misstatement C) The amount, likelihood, and classification of the misstatement D) The amount and the classification of the misstatement

B) The likelihood of the misstatement

Which of the following is/are performed in an audit of internal control over financial reporting? 1. Procedures to obtain an understanding of internal control 2. Test of details of balances 3. Analytical Procedures A) Yes, Yes, No B) Yes, No, No C) No, Yes, Yes D) No, No, No

B) Yes, No, No

The document that details the specific audit procedures for each type of test is the: A) audit strategy. B) audit program. C) audit procedure. D) audit risk model.

B) audit program.

You are auditing Rodgers and Company. After performing substantive analytical procedures you conclude that, for the accounts tested, the client's balance appears reasonable. This may indicate that: A) details test of balances can be eliminated for those accounts. B) certain tests of details of balances may be eliminated for those accounts. C) control tests may be eliminated for those accounts. D) control tests may be reduced for those accounts.

B) certain tests of details of balances may be eliminated for those accounts.

Management implements internal controls to ensure that all required footnote disclosures are accurate. Auditors tests those controls to provide evidence supporting the ________ presentation. A) completeness and valuation B) completeness and accuracy C) rights and obligations and existence D) occurrence and accuracy

B) completeness and accuracy

Tests of controls are directed toward the control's: A) efficiency. B) effectiveness. C) cost and effectiveness. D) cost benefit ratio.

B) effectiveness.

An exception or deficiency found in a test of controls: A) indicates a financial statement misstatement. B) indicates the likelihood of a misstatement. C) indicates that the financial statements are fairly stated. D) indicates that an adverse opinion is warranted on the audit of internal control.

B) indicates the likelihood of a misstatement.

The purpose of tests of controls is to provide reasonable assurance that the: A) accounting treatment of transactions and balances is valid and proper. B) internal control procedures are functioning as intended. C) entity has complied with GAAP disclosure requirements. D) entity has complied with requirements of quality control.

B) internal control procedures are functioning as intended.

The reliance the auditor places on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily: A) parallel. B) inverse. C) direct. D) equal.

B) inverse.

A procedure designed to test for monetary misstatements directly affecting the correctness of financial statement balances is a: A) test of controls. B) substantive test. C) test of attributes. D) monetary-unit sampling test.

B) substantive test.

At what point in the audit process are tests of details most appropriately designed? A) Plan and design audit approach B) Perform audit tests for controls and transactions C) Perform analytical procedures and tests of balances D) Complete the audit and issue the audit report

C) Perform analytical procedures and tests of balances

Which of the following is generally not included in the "evidence mix"? A) Tests of controls B) Substantive tests of transactions C) Risk assessment procedures D) Tests of details of balances

C) Risk assessment procedures

Which of the following further audit procedures are used to determine whether all six transaction-related audit objectives have been achieved for each class of transactions? A) Tests of controls B) Risk assessment procedures C) Substantive tests of transactions D) Preliminary analytical procedures

C) Substantive tests of transactions

Which audit tests involve physical examination and confirmation? A) Tests of controls B) Tests of transactions C) Tests of balances D) Analytical procedures

C) Tests of balances

Which of the following audit tests form the basis for an auditor's report on internal control over financial reporting? A) Analytical procedures B) Tests of transactions C) Tests of controls D) Tests of details of balances

C) Tests of controls

Which of the following procedures would most likely be performed in response to the auditor's assessment of the risk of monetary misstatements in the financial statements? A) Ratio analysis B) Tests of controls C) Tests of details of balances D) Risk assessment procedures

C) Tests of details of balances

Which of the following types of procedures will be performed in an audit of internal control over financial reporting? 1. Procedures to obtain an understanding of internal control 2. Ratio analysis A) Yes, Yes B) No, No C) Yes, No D) No, Yes

C) Yes, No

When designing the audit program and the particular audit tests, the auditor should keep in mind that: A) the audit program is broken down into two parts-the risk assessment procedures and the tests of details of balances. B) the tests of controls will not vary depending on assessed control risk. C) analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning. D) auditing standards require that the tests contained in the audit program must be approved by the PCAOB.

C) analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning.

In the context of an audit of financial statements, substantive tests are audit procedures that: A) may be eliminated under certain conditions. B) are designed to discover significant subsequent events. C) are designed to test for dollar misstatements. D) will increase proportionately with the auditor's reliance on internal control.

C) are designed to test for dollar misstatements.

An increased extent of tests of controls is most likely to occur when: A) it is a first-year audit. B) the auditor is doing a "fraud audit." C) controls are effective and the preliminary control risk assessment is low. D) controls are ineffective and the preliminary control risk assessment is high

C) controls are effective and the preliminary control risk assessment is low.

A system walkthrough is primarily used to help the auditor: A) test the ending account balances. B) test the details of transactions. C) determine whether internal controls are in place. D) determine whether the audit engagement should be accepted.

C) determine whether internal controls are in place.

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's: A) audit strategy. B) tests of controls. C) risk assessment procedures. D) tests of transactions.

C) risk assessment procedures.

Analytical procedures must be performed in: A) the planning and test of control stages. B) conjunction with tests of transactions and tests of details of balances. C) the planning and completion stages. D) the planning, test of control, and completion stages.

C) the planning and completion stages.

Many auditors perform extensive analytical procedures on audits because: A) they are required by GAAS. B) they pinpoint errors in accounts. C) they indicate areas of potential risk and misstatement. D) they are required for tests of controls.

C) they indicate areas of potential risk and misstatement.

Presentation and disclosure related audit objectives would be performed in which phase of the audit process? A) Plan and design audit approach B) Perform audit tests for controls and transactions C) Perform analytical procedures and tests of balances D) Complete the audit and issue the audit report

D) Complete the audit and issue the audit report

Which of the following would not be considered further audit procedures? A) Tests of controls B) Analytical procedures C) Tests of details of balances D) Risk assessment procedures

D) Risk assessment procedures

In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly? A) Analytical procedures B) Risk assessment procedures C) Tests of controls D) Tests of details of balances

D) Tests of details of balances

What type of test is used to obtain the most types of evidence? A) Substantive tests of transactions B) Tests of controls C) Risk assessment tests D) Tests of details of balances

D) Tests of details of balances

Which of the following is ordinarily designed to detect material dollar errors on the financial statements? A) Tests of controls B) Analytical review procedures C) Computer controls D) Tests of details of balances

D) Tests of details of balances

Analytical procedures: A) involve comparisons of recorded amounts to expectations developed by management. B) are only performed during the planning stage of the audit. C) are required to be performed when auditing an account balance. D) provide substantive evidence.

D) provide substantive evidence.

When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would: 1. Perform additional tests of controls 2. Decide to modify tests of details of balances A. Yes, Yes B. No, No C. Yes, No D. No, Yes

D. No, Yes

What types of evidence may be obtained for risk assessment procedures?

Inspection, observation, inquiries of the client

What types of evidence may be obtained for Tests of Controls?

Inspection, observation, inquiries of the client, and reperformance

List the 5 types of audit tests

Risk Assessment Procedures Tests of Controls Substantive tests of transactions Analytical Procedures Tests of details of balances

What types of evidence may be obtained for Analytical Procedures?

inquiries of the client and analytical procedures

What types of evidence may be obtained for Substantive tests of transactions?

inspection, inquiries of the client, reperformance, recalculation

What types of evidence may be obtained for Tests of details of balances?

physical examination, inspection, confirmation, inquiries of the client, reperformance, recalculation