Chapter 13 Compilation Competition

The auditor has determined that a key control in the audit of the sales and collection cycle is that recorded sales are supported by authorized shipping documents and approved customer orders. What typical test of controls should be used in this situation? A) Examine a sample of duplicate sales invoices to determine that each on is supported by an authorized shipping document and approved customer order. B) Observe whether shipping documents are forwarded daily to billing and observe when they are billed. C) Examine a sample of sales invoices and agree prices to the authorized computer price list. D) Use audit software to trace postings from the batch of sales transactions to the subsidiary and general ledgers.

A) Examine a sample of duplicate sales invoices to determine that each on is supported by an authorized shipping document and approved customer order.

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 client's 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 client's end of the fiscal year.

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.

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. substantive 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

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.

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.

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

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

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

B) effectiveness.

The ________ is the combination of the types of tests to obtain sufficient appropriate evidence for a cycle. There are likely to be variations in the mix from cycle to cycle depending on the circumstances of the audit. A) testing mix B) evidence mix C) audit process mix D) procedures mix

B) evidence mix

Transaction-related audit objectives would most likely be performed in which phase of the audit process? A) plan and design audit approach B) perform tests of controls and substantive tests of transactions C) perform substantive analytical procedures and tests of details of balances D) complete the audit and issue the audit report

B) perform tests of controls and substantive tests of transactions

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

B) substantive analytical 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 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

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 have been properly implemented. D) determine whether the audit engagement should be accepted.

C) determine whether internal controls have been properly implemented.

If the auditor finds extensive control test deviations and significant misstatements while performing substantive tests of transactions and substantive analytical procedures, A) the cost of the audit should decrease. B) the auditor will conclude that internal controls are effective. C) extensive tests of details of balances will need to be performed. D) all of the above

C) extensive tests of details of balances will need to be performed.

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

There is a direct relationship between the ________ transaction-related audit objective and the ________ balance-related audit objective. A) occurrence; existence B) timing; cutoff C) posting and summarization; detail tie-in D) all of the above

D) all of the above

Which phase(s) of the audit uses inquiries of clients as a type of evidence? A) plan and design B) tests of controls and substantive tests of transactions C) completion of the audit and issuance of the audit report D) all of the above

D) all of the above

Analytical procedures A) focus on the ending balances for income statement accounts. 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.

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) substantive analytical procedures B) risk assessment procedures C) tests of controls D) tests of details of balances

D) tests of details of balances