Audit Chapter 10
12) The auditor would like to design a test of control to test that statements are mailed to all customers each month. Which of the following typical tests of controls would be suitable? A) Inquire about who is responsible for mailing the statements. B) Find out whether customers pay by statement or by invoice. C) Reconcile subsequent payments to particular invoices. D) Match remittance advices from customers to customer statements.
A
13) Last year the materiality for the client was $590 000. This year it is $400 000. All things being equal, how will this change in materiality affect the extent of tests of details? A) increase B) decrease C) no effect as the tests of controls will be increased D) no effect as the tests of controls will be decreased
A
15) If the auditor is not using tests of control, then A) tests of detail must be used. B) analytical procedures must be used. C) tests of design of internal controls must at least be used. D) the auditor will have to qualify the audit opinion.
A
17) A standard audit program can dramatically increase A) audit efficiency. B) quality of audit evidence. C) communication among the audit team. D) the amount of work that can be delegated to more junior staff members.
A
19) Donna sees a large variation in the gross margin percentage as a result of analytical procedures she performed. This means that A) Donna should perform more tests. B) the financial statements contain an error. C) Donna cannot rely on the company's internal controls. D) Donna should document this difference.
A
2) After finishing the procedures to obtain an understanding of internal control in an audit engagement, the auditor should perform tests of controls on A) those controls that the auditor 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
2) 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) confirmations
A
20) A procedure designed to test for dollar errors or irregularities directly affecting the correctness of financial statement balances is a(n) A) substantive test. B) analytical test. C) test of controls. D) definition of dollar-unit sampling.
A
3) When considering the relationships between types of audit tests and evidence, which of the following procedures are used for both obtaining an understanding of internal control and for conducting tests of controls? A) inspection, recalculation, observation, inquiry, and reperformance B) inspection, recalculation, external confirmation, and reperformance C) recalculation, observation, inquiry, analytical procedures, and reperformance D) analytical procedures, inspection, recalculation, and reperformance
A
3) When does the auditor normally conduct tests of controls? A) prior to the completion of the tests of details B) after the completion of all analytical review C) prior to the preparation of the client risk analysis D) prior to the finalization of the audit risk model
A
3) When the auditor assesses the likelihood of material misstatement in the financial statements, the auditor will use A) risk assessment procedures. B) procedures to obtain an understanding. C) tests of control. D) assessment of design effectiveness of controls.
A
4) CAS 240 requires which of the following to be considered a significant risk? A) revenue recognition B) inventory valuation C) accounts receivable valuation D) calculation of income taxes
A
4) The highest-cost audit will be incurred when the auditor expects that the internal control system would A) be effective but the auditor found extensive control test deviations. B) have few effective controls but client's personnel were well-trained and knowledgeable. C) be very sophisticated and the tests of controls confirmed this. D) have few effective controls and tests of balances found many errors.
A
6) The auditor has conducted tests of controls of the write-off of accounts receivable and found two exceptions. These exceptions are A) an indication of the likelihood of errors or fraud and other irregularities. B) confirmation that controls are not functioning as designed throughout the year. C) information about the quantity of the dollar error in accounts receivable. D) indications that employee training is required in the accounting area.
A
7) Eleonora is inspecting a sample of "Code of Conduct Acknowledgement" forms that must be signed by all employees to indicate that they have read and understood the company's code of conduct. Eleonora is ensuring that they have been signed by the employees. Eleonora is performing A) a test of controls. B) an analytical procedure. C) a substantive procedure. D) a procedure to obtain an understanding of internal controls.
A
8) After completing tests of key controls, the auditor should review the results and consider whether A) the planned degree of reliance on internal controls is justified. B) the audit evidence obtained from the study of internal controls can provide a reasonable basis for an opinion. C) further study of internal controls is likely to justify any restriction of tests of details of balances. D) sufficient knowledge has been obtained about the entity's entire internal control structure.
A
1) Analytical procedures are mandatory during which phases of the audit? A) tests of controls and tests of details B) planning and final evaluation C) planning and tests of details D) tests of details and final evaluation
B
12) Tests of details are designed based upon planned results of analytical review and planned results of tests of controls. Should the planned results differ materially from the actual results of analytical review and tests of controls, then A) audit risk will be revised. B) the planned audit program will require revision. C) inherent risk will be revised. D) tests of controls will not be considered for overall risk assessment processes.
B
15) Julianne is performing an analysis of the bad debt expense as a percentage of total sales. When performing the analytical procedure, it is important that Julianne A) can rely on the internal controls of the accounts receivable process. B) has an expectation of the result that should be obtained. C) has concluded that the accounts receivable balance is free from material misstatement. D) has requested permission from the client.
B
18) If no material fluctuations are found using analytical procedures and the auditor concludes that differences should not have occurred, A) it will be necessary to increase the tests of details of balances. B) other tests may be reduced. C) it will be necessary to increase the tests of controls. D) it will not be necessary to perform tests of details of balances.
B
18) Which of the following ultimately determines the specific audit procedures necessary to provide an auditor with a reasonable basis for the expression of an opinion? A) the audit program B) the auditor's professional judgment C) generally accepted auditing standards D) the auditor's working papers
B
4) An example of an audit procedure that relates to the auditor's understanding of internal control is to A) reperform the counting of physical inventory. B) inspect documents and records. C) recalculate the depreciation expenses. D) trace all legal expenses to supporting invoices.
B
5) The auditor has decided that there is a risk of material misstatement with respect to sales revenue. Which of the following audit tests should the auditor use to quantify the potential error? A) discuss the process used to assign credit limits with the sales manager and the controller B) send external confirmations to customers with accounts receivable balances C) determine whether all sales tested have a supporting customer purchase order D) determine whether all sales tested have a matching bill of lading
B
5) There will be heavy emphasis on tests of controls when A) controls are ineffective and assessed control risk is high. B) controls are effective and assessed control risk is low. C) the auditor is doing a "fraud audit." D) it is a first-year audit.
B
5) Which of the following areas is considered to have a high risk of fraud in the retail industry? A) point-of-sale sales B) customer refunds C) credit sales D) completeness of payroll
B
6) A PA is conducting the audit of Middi Furniture Company, a medium-sized company with few effective controls and significant inherent risks. Management has decided that it is not cost-effective to implement better internal controls. What audit strategy will the PA likely select for this client? A) combined audit approach for all transaction cycles and accounts B) substantive audit approach for all transaction cycles and accounts C) combined audit approach for all cycles except cash and inventory D) substantive audit approach for all cycles except sales and payroll
B
6) 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) accounting control procedures are operating effectively. C) entity has complied with the disclosure requirements of a generally accepted accounting framework. D) entity has complied with requirements of quality control.
B
7) Symco Inc. has a policy that all cash disbursements of $2000 or more must be approved by the treasurer. While performing a test of controls on a sample of disbursements, Craig discovered that the assistant controller had authorized a cash disbursement of $3500 while the treasurer was on vacation. This control deviation is significant only if A) it is determined that the assistant controller is not qualified to approve cash disbursements of this size. B) it occurred with sufficient frequency to cause the auditor to believe there may be material dollar misstatements in the statements. C) the amount of the deviation identified is larger than the planning materiality. D) the amount of the deviation identified is larger than the planning materiality and no compensating control exists.
B
8) The auditor selects several transactions in each functional area and traces them through the entire accounting system, paying special attention to evidence about whether or not the control features are in operation. This is an example of a A) sequence test. B) test of controls. C) substantive test. D) functional test.
B
9) Control risk has been assessed at 100% for your client. What audit approach will you follow? A) a combined approach B) a substantive approach C) reliance on analytical review and tests of controls D) reliance on tests of controls and tests of details
B
1) Which of the following audit tests is usually the most costly to perform? A) analytical procedures B) tests of controls C) tests of details of balances D) procedures to obtain an understanding of internal control
C
10) A PA has designed an audit approach where she places maximum possible reliance on controls. This means that she will be A) conducting only tests of controls. B) using analytical review and tests of controls. C) following a combined audit approach. D) setting control risk at 100%.
C
14) Materiality is used to help decide the scope of testing, determine the sample size, and A) develop the audit report. B) decide which analytical review calculations to use. C) evaluate the results of testing. D) conduct understanding of business tests.
C
14) Risks of fraud are assessed at which level(s) of the audit? A) overall audit, transaction-related audit objectives B) balance-related audit objectives only C) overall audit, cycle, and account D) cycle, account, and transaction-related audit objectives
C
16) Cimco Forest is a client of your PA firm that has requested that the audit of its financial statements be completed 25 days after its year end. Given the time constraint, the auditor A) should not accept Cimco as a client. B) should increase the size of the audit team. C) can perform audit procedures at an interim date and roll forward the interim balances to year end. D) should change the audit program to include more tests of controls and fewer tests of details, as they are more time consuming.
C
17) The auditor of ABC Ltd. has concluded that there are significant risks of misstatement of revenue at the company with potential overstatement of revenue. Which of the following audit tests should the auditor conduct to address this significant risk? A) control tests of authorization to ensure that credit limits for sales are all approved by the sales manager B) analytical review of sales comparing sales trends over the last five years by division and to the industry C) examination of sales after the year end to quantify potential cutoff errors (income from the subsequent period included in the current year) D) risk assessment procedures looking carefully at inherent risks associated with the handling of cash in the sales cycle
C
2) 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) may be either direct tests of financial balances or analytical tests. D) will increase proportionately with the auditor's reliance on internal control.
C
2) When considering the relationships between types of audit tests and evidence, which of the following procedures is suitable for use for all types of audit tests (procedures to obtain an understanding of internal control, tests of controls, analytical procedures, and tests of details of balances)? A) inspection B) observation C) inquiries of the client D) recalculation
C
22) The auditor verifies the summarizing, accuracy, and posting of entries by performing A) analytical procedures. B) tests of controls. C) dual-purpose tests. D) procedures to gain an understanding of internal control.
C
3) The auditor is deciding upon audit procedures to be used in the audit for a particular cycle (i.e., the combination of the four types of tests needed to obtain sufficient appropriate audit evidence). This type of decision is called A) audit risk. B) audit strategy. C) evidence mix. D) detection risk.
C
5) An example of an audit procedure that relates to the auditor's understanding of internal control is to A) count petty cash at all locations. B) use test data to verify functioning of data entry controls. C) observe entity activities and operations. D) trace all large fixed-asset purchases to supporting invoices.
C
10) The auditor would like to design a test of control to test that shipping documents are issued in numerical order by the computer and are accounted for weekly. Which of the following typical tests of controls would be suitable? A) Trace sales documents issued to the sales journal and trace the daily total to the general ledger. B) Ask the shipping department about the process they use to issue shipping documents, paying particular attention to continuity of numerical sequence. C) Use computer-assisted audit testing to determine whether there are any numbers missing in the sequence (gap detection). D) Match shipments to the associated sales invoices.
C 11) The auditor would like to design a test of control to test that unit selling prices are obtained from the price list master file of approved prices. Which of the following typical tests of controls would be suitable? A) Compare prices used on sales invoices to the authorized customer purchase order. B) Review changes to the price file throughout the year for proper authorizations and trace prices to copies of sales invoices. C) Use analytical review to compare total sales last year to total sales this year. D) Discuss the process used to authorize sales prices with the sales manager and the controller. Answer: B
1) A planned approach to the conduct of audit testing, taking into account assessed risks, is called an A) audit approach. B) audit plan. C) audit program. D) audit strategy.
D
1) Audit risk is assessed at which level of the audit? A) account B) cycle C) transaction-related audit objective D) overall audit
D
1) Conversion is the process of A) testing data. B) cleaning data in the legacy system. C) testing data during an implementation. D) transferring data from a legacy system to a new system.
D
1) When considering the relationships between types of audit tests and evidence, which of the following procedures is used only for tests of details of balances? A) inspection B) recalculation C) reperformance D) external confirmation
D
11) The audit program for most audits is designed in three parts. These parts are A) risk assessment procedures, tests of controls, and tests of details. B) risk assessment procedures, analytical procedures, and tests of details. C) obtaining an understanding of internal controls, analytical procedures, and tests of details. D) tests of controls, analytical procedures, and tests of details of balances.
D
13) When the auditor identifies an area of the accounting system with missing controls (i.e., a weakness or deviation), this would lead to a modification of the audit program in that area that would A) increase the amount of tests of controls. B) increase the reliance on tests of controls. C) cause the issuance of a qualified or adverse opinion. D) eliminate the need for a test of controls.
D
16) When the auditor has determined that there is a significant risk of misstatement for a particular assertion (for example, completeness of revenue), what type of audit testing does CAS 330 require? A) tests of risk assessment B) tests of understanding of internal control C) control tests D) substantive tests
D
2) Choosing the appropriate analytical procedures requires the auditor to use A) the standards developed by the auditor's firm. B) automated working paper software. C) computer-assisted audit techniques. D) professional judgment.
D
2) During a change to an entire IT system, if conversion controls are poor or are not documented, the auditor will need to A) conduct an implementation audit. B) conduct a legacy system audit. C) conduct an audit of the new system. D) conduct a conversion audit.
D
21) Performance of tests of controls provide evidence in support of the specific controls that contribute to the auditor's assessed control risk (where it is reduced below 100%). Also, when dual-purpose tests are used, evidence is also obtained in support of A) the nature of illegal acts that occurred. B) the quantitative effects of fraud risks. C) statistical ratios to assist analytical review. D) monetary correctness of transactions.
D
23) The auditor has completed analyzing the results of tests of details of the accounts receivable ending balance. Errors totaling $25 000 were found. These exceptions are A) indications that the credit limit is being incorrectly applied. B) probably cutoff errors that can be explained. C) an indication of potential errors in the ending balance. D) financial statement misstatements.
D
4) Which of the following is an example of a substantive test that could be used for the audit of the accuracy of sales prices? A) inspect sales price master authorization forms for the presence of an approval signature B) observe that the point-of-sale system automatically pulls sales prices from the master file C) inquire about the process that is used to update sales prices in the sales price master file D) calculate the gross margin for each product that is sold by the company
D
6) A substantive procedure is used to A) assess the likelihood of material misstatement in the financial statements. B) obtain an understanding of internal controls. C) analyze the account balance to see if there are potential errors. D) quantify the amount of potential error in an account or transaction stream.
D
9) The auditor would like to design a test of control to test that there is a separation of duties between billing, recording sales, and handling of cash receipts. Which of the following typical tests of controls would be suitable? A) Match the amounts billed to the amounts recorded. B) Verify that sales have been recorded in the proper period. C) Trace cash receipts to the duplicate bank deposit slips. D) Inquire about the duties of the accounting personnel.
D
