Audit Ch13
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.
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.
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 placed on the controls B) relatively little emphasis placed on the controls C) moderate emphasis placed on the controls D) heavy emphasis placed on the controls
A) no emphasis placed on the controls
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.
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 balances for accounts in the client's ending trial balance B) tests of details of balances focus on the transactions during the period 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 balances for accounts in the client's ending trial balance
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
After finishing the review phase of the study and evaluation of internal control in an audit, the auditor should perform tests of controls on: A) those controls that the auditor wants and plans to rely upon. B) those controls in which material weaknesses were identified. C) those controls that have a material effect upon the financial statement balances. D) a random sample of the controls that were reviewed.
A) those controls that the auditor wants and plans to rely upon.
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. 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 effectives 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) Documentation B) Confirmation C) Inquiries of the client D) Reperformance
B) Confirmation
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) Indentify 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) Indentify accounts that have high inherent risk.
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.
A document that details what the auditor will do to gather sufficient, appropriate evidence 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 test of balances procedures 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 test of balances procedures may be eliminated for those accounts.
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
Tests of controls are directed toward the control's: A) efficiency. B) effectiveness. C) efficiency 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 that a financial statement misstatement may be likely. C) indicates that the financial statements are misstated. D) indicates that an adverse opinion is warrarnted on the Audit of Internal Control.
B) indicates that a financial statement misstatement may be likely.
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.
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
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.
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 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 audit tests is usually the most costly to perform? A) Analytical procedures B) Tests of controls C) Tests of balances D) Substantive tests of transactions
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
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: A) test balances. B) test details of transactions. C) gain an understanding of internal controls. D) determine acceptance of the client.
C) gain an understanding of internal controls.
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
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.
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 D) preliminary analytical procedures
C) substantive tests
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
Auditors who test manual controls that rely on IT-generated reports must consider: A) the benefits of relying on IT-generated reports. B) separation of duties related to the IT-generated reports. C) the controls related to the accuracy of the information in the report. D) whether the manual controls are approved by the audit committee.
C) the controls related to the accuracy of the information in the report.
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.
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 more types of evidence than any other? A) Substantive tests of transactions B) Tests of controls C) Analytical procedures D) Tests of details
D) Tests of details
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
The most important consideration in developing the audit plan and audit program is the: A) client's size. B) client's industry. C) audit firm's available personnel. D) audit risk model used in its planning form.
D) audit risk model used in its planning form.
If the results of the tests of controls, substantive tests of transactions, and analytical procedures are not consistent with the predictions, tests of details of balances will be: A) eliminated. B) increased. C) unaffected. D) changed.
D) changed.
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 is not a direct result of performing analytical procedures? A) identify areas of potential misstatements B) reduce detailed audit tests C) understand the client's business D) identify specific errors in the accounts
D) identify specific errors in the accounts
3) Which of the following would not be considered further audit procedures? A) tests of controls B) substantive analytical procedures C) tests of details of balances D) risk assessment procedures
D) risk assessment procedures
Analytical procedures are the most expensive type of audit test to perform because of the expertise and training required to properly use them. A) True B) False
False
Auditing standards require that tests of controls be performed on every audit engagement. A) True B) False
False
If inherent risk is increased to medium from low, tests of details of balances can be reduced. A) True B) False
False
If the auditor's preliminary assessment of control risk is decreased from high to medium, tests of controls can be reduced. A) True B) False
False
Procedures to obtain an understanding of internal control may suffice for tests of controls when the auditor is assessing control risk in a well defined transaction cycle that has not contained material misstatements in prior audits. A) True B) False
False
Substantive tests of details of balances are the most costly type of audit test to perform. A) True B) False
False
Tests of controls should be performed after substantive tests of transactions. A) True B) False
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
False
The evidence mix includes risk assessment procedures. A) True B) False
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
False
Under normal circumstances, there should be no variation in the audit evidence mix from cycle to cycle for a given audit engagement. A) True B) False
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
False
When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would: Perform additional tests of controls Decide to modify tests of details of balances
No Yes
An exception in a substantive test of transactions provides an indication of the likelihood of monetary misstatements in the financial statements because substantive tests of transactions do reveal whether monetary misstatements have actually occurred. A) True B) False
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
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
True
Analytical procedures are the least costly type of audit test. A) True B) False
True
Analytical procedures provide fewer types of evidence than any other type of audit test. A) True B) False
True
Auditing standards recognize that in instances where a significant amount of audit evidence is in electronic form, it may not be possible to reduce detection risk to an acceptable level by performing only substantive tests. A) True B) False
True
Auditing standards require a written audit program. A) True B) False
True
If tests of controls reveal that controls are sufficiently effective to justify reducing control risk, the auditor is justified in reducing substantive audit tests. A) True B) False
True
In the audit of a public company, computer controls must be tested if they are considered to be key controls for reducing the likelihood of material misstatements in the financial statements. A) True B) False
True
One difference between the procedures used to obtain an understanding of internal control and procedures used to test those controls is that tests of controls are more extensive. A) True B) False
True
Procedures to obtain an understanding of internal control may suffice for tests of controls when the auditor is assessing automated controls. A) True B) False
True
Substantive tests of transactions and control tests are often conducted simultaneously. A) True B) False
True
Substantive tests of transactions focus on the changes in the beginning and ending of the year balances, particularly for the balance sheet. A) True B) False
True
Tests of controls and substantive tests of transactions are normally conducted simultaneously on the same transactions. A) True B) False
True
Tests of controls are generally more costly to perform than analytical procedures. A) True B) False
True
Tests of controls provide evidence about the likelihood for misstatements in a client's financial statements. A) True B) False
True
The results of tests of controls and substantive tests of transactions affect the design of tests of details of balances. A) True B) False
True
When analytical procedures are performed during substantive testing, they are typically more focused and extensive than when performed as part of audit planning. A) True B) False
True
When designing an audit program for tests of details of balances, the auditor should make assumptions about inherent risk and control risk, and predictions concerning the outcome of tests of controls, substantive tests of transactions, and analytical procedures. A) True B) False
True
Which of the following types of procedures will be performed in an audit of internal control over financial reporting? Procedures to obtain an understanding of internal control Ratio Analysis
Yes No
Which of the following is/are performed in an audit of internal control over financial reporting? Procedures to obtain an understanding of internal control Test of details of balances Analytical Procedures
Yes No No
