Chapter 8

Ratio - Year 1 - Year 2 - Explanation? 1. Debt to equity - 1.99 - 4.61 2. Gross profit percentage - 38% - 41% 3. Quick - 2.00 - 1.50 4. Inventory turnover - 4.50 - 3.25 5. Return on equity - 3% - 8%

1. Capital stock was issued during the year 2. Cost of goods sold decreased by less than sales decreased during the year 3. Proceeds from the issuance of noncurrent debt were used to pay accounts payable 4. Inventory decreased by more than cost of goods sold decreased for the year 5. Capital stock was issued dring the year

An auditor is least likely to test controls that provide for 1. Classification of revenue and expense transactions by product line. 2. Separation of the functions of recording disbursements and reconciling the bank account. 3. Approval of the purchase and sale of trading securities. 4. Comparison of receiving reports and vendors' invoices with purchase orders.

1. Classification of revenue and expense transactions by product line.

An auditor may decide to perform only substantive procedures for certain assertions because the auditor believes 1. Controls are not relevant to the assertions. 2. The entity's control components are interrelated. 3. Sufficient appropriate audit evidence to support the assertions is likely to be available. 4. More emphasis on tests of controls than substantive tests is warranted.

1. Controls are not relevant to the assertions.

The risks of material misstatement (RMMs) should be assessed in terms of 1. Financial statement assertions. 2. Control environment factors. 3. Specific controls. 4. Types of potential fraud.

1. Financial statement assertions.

Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without the knowledge of client operating personnel? 1. Integrated test facility (ITF). 2. Input controls matrix. 3. Parallel simulation. 4. Data entry monitor.

1. Integrated test facility (ITF).

Which of the following is true related to the auditor's consideration of controls? 1. Misstatements detected by the auditor's substantive procedures should be considered when testing the effectiveness of related controls. 2. The auditor should consider testing and documenting the efficiency of the entity's controls related to relevant assertions. 3. A material misstatement detected by the auditor, but not detected by the entity, should be considered a material weakness in internal control. 4. The absence of misstatements detected by an auditor's substantive procedures should be considered evidence that controls related to the relevant assertion being tested are effective.

1. Misstatements detected by the auditor's substantive procedures should be considered when testing the effectiveness of related controls.

1. Because of a weakness in controls, the auditor sent positive confirmations rather than negative confirmations to customers. 2. Because of a fraud risk, the auditor took inventory at year end rather than at an interim date and selected a larger sample to test the count. 3. Because the last day of the year was a Sunday, the auditor observed the inventory on the previous Saturday. 4. Because of a larger balance in the equipment account, the auditor tested depreciation for more items. 5. Because accounts payable represented a larger percentage of current liabilities, the auditor sent confirmations in addition to repeating the procedures performed in the prior year.

1. Nature 2. Extent and timing 3. None 4. Extent 5. Nature and extent

1. The primary advantage of this approach is that it directly tests specific controls. 2. When using this approach, the auditor can test edit checks by including a dummy transaction in the client's set of transactions and by evaluating an error listing. 3. A disadvantage of this approach is that audit hooks must be programmed into the operating system and applications programs. 4. The primary advantage of this approach is that transactions from throughout the period may be reprocessed and the results can be compared with the client's results to provide assurance that edit checks have been applied during the period. 5. When using this approach, the auditor prepares a set of dummy transactions specifically designed to test the control activities that management claims to have incorporated into the processing programs. 6. The primary disadvantages of this approach are the cost of obtaining the program and the coordination effort required to obtain transactions to reprocess. 7. This approach is an integral part of an application system that is designed to identify and report actual transactions and other information that meet criteria having audit significance. 8. The primary disadvantages of this approach are that it requires considerable coordination, and the dummy transactions must be purged prior to internal and external reporting. 9. This approach uses a controlled program to reprocess sets of client transactions and compares the auditor-achieved results with those of the client. 10. The primary disadvantage of this approach is that it tests processing at only one moment in time. 11. This approach tests the actual program in operation using dummy transactions. 12. An advantage of this approach is that it permits continuous monitoring of online, real-time systems.

1. Test data approach 2. Integrated test facility 3. Embedded audit module 4. Parallel simulation 5. Test data approach 6. Parallel simulation 7. Embedded audit module 8. Integrated test facility 9. Parallel simulation 10. Test data approach 11. Integrated test facility 12. Embedded audit module

When numerous property and equipment transactions occur during the year, an auditor who assesses the risks of material misstatement at a low level usually performs 1. Tests of controls and limited tests of current-year property and equipment transactions. 2. Tests of controls and extensive tests of property and equipment balances at the end of the year. 3. Analytical procedures for property and equipment balances at the end of the year. 4. Analytical procedures for current-year property and equipment transactions.

1. Tests of controls and limited tests of current-year property and equipment transactions.

1. The auditor performed a significant number of tests at an interim date and relied heavily on analytical procedures as substantive tests. 2. The auditor performed tests of controls and, based on the results of those tests, increased substantive testing. 3. The auditor did not perform tests of controls based on a preliminary assessment. 4. The auditor's assessment of inherent risk was high and the assessment of control risk was low. 5. The auditor performed tests of controls and concluded the probability was low that they were effective. 6. The auditor believed a potential risk of fraud existed. 7. After performing tests of controls, the auditor determined the client's internal controls are effective and decided to rely on them.

1. The auditor likely assessed the risk of material misstatement as low 2. The auditor likely assessed the risk of material misstatement as high 3. The auditor likely assessed the risk of material misstatement as high 4. It cannot be determine how the auditor assessed the risk of material misstatement 5. The auditor likely assessed the risk of material misstatement as high 6. The auditor likely assessed the risk of material misstatement as high 7. The auditor likely assessed the risk of material misstatement as low

If an auditor is obtaining an understanding of an issuer's information and communication component of internal control, which of the following factors should the auditor assess? 1. The classes of transactions in the issuer's operations that are significant to the issuer's financial statements. 2. The integrity and ethical values of top management. 3. The oversight responsibility over financial reporting and internal control by the board or audit committee. 4. The philosophy and operating style of management to promote effective internal control over financial reporting.

1. The classes of transactions in the issuer's operations that are significant to the issuer's financial statements.

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following? 1. The planned level of assurance at the relevant assertion level. 2. The planned level of control risk. 3. The effectiveness of internal controls. 4. Management's assertions that internal controls exist and are operating efficiently.

1. The planned level of assurance at the relevant assertion level.

An auditor wishes to evaluate the design and perform tests of controls over a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by 1. Confirmation and observation. 2. Observation and inquiry. 3. Analytical procedures and confirmation. 4. Inquiry and analytical procedures.

2. Observation and inquiry.

Which of the following internal control activities most likely would be used to maintain accurate inventory records? 1. Perpetual inventory records are periodically compared with the current cost of individual inventory items. 2. Periodic inventory counts are used to adjust the perpetual inventory records. 3. A just-in-time inventory ordering system keeps inventory levels to a desired minimum. 4. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved.

2. Periodic inventory counts are used to adjust the perpetual inventory records.

A client maintains perpetual inventory records in both quantities and dollars. If the assessment of the risks of material misstatement is high, an auditor will probably 1. Increase the extent of tests of controls relevant to the inventory cycle. 2. Request the client to schedule the physical inventory count at the end of the year. 3. Insist that the client perform physical counts of inventory items several times during the year. 4. Apply gross profit tests to ascertain the reasonableness of the physical counts.

2. Request the client to schedule the physical inventory count at the end of the year.

Which of the following statements about the auditor's response to assessed risks of material misstatement in a financial statement audit is true? 1. Reliance on internal control may be sufficient to allow the auditor to eliminate substantive testing for significant transaction classes. 2. Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of controls. 3. When assessing the risks of material misstatement, an auditor should not consider evidence obtained in prior audits about the operation of controls. 4. When the risks of material misstatement are high, an auditor should reduce the amount of substantive testing.

2. Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of controls.

When an auditor tests a computerized accounting system, which of the following is true of the test data approach? 1. Several transactions of each type must be tested. 2. Test data are processed by the client's computer programs under the auditor's control. 3. The program tested is different from the program used throughout the year by the client. 4. Test data must consist of all possible valid and invalid conditions.

2. Test data are processed by the client's computer programs under the auditor's control.

If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year end? 1. Tests of details of activity during the period since the interim testing date. 2. Tests of details for the entire year under audit. 3. Reconciliation of year-end balances to interim balances. 4. Substantive analytical procedures of the period since the interim testing date.

2. Tests of details for the entire year under audit.

In performing tests of controls, the auditor will normally find that 1. The rate of error in the sample exceeds the rate of deviations. 2. The rate of deviations in the sample exceeds the rate of error in the accounting records. 3. All unexamined items result in errors in the accounting records. 4. The level of inherent risk is directly proportional to the rate of error.

2. The rate of deviations in the sample exceeds the rate of error in the accounting records.

A university does not have a centralized receiving function for departmental purchases of books, supplies, and equipment. Which of the following controls will most effectively prevent payment for goods not received, if performed prior to invoice payment? 1. Names and addresses on vendor invoices should be compared to a list of department-authorized vendors. 2. Vendor invoices should be approved by a departmental supervisor other than the employee ordering the goods. 3. Vendor invoices should be matched with department purchase orders. 4. Invoices over a specified amount should be approved by the vice president of finance.

2. Vendor invoices should be approved by a departmental supervisor other than the employee ordering the goods.

What is the primary advantage of parallel simulation? 1. It provides for continuous monitoring of online, real-time systems. 2. It tests the controls directly. 3. Any transactions during the period may be reprocessed. 4. Processing is tested at one moment in time.

3. Any transactions during the period may be reprocessed.

When numerous property and equipment transactions occur during the year, an auditor who assesses the risks of material misstatement at a low level usually performs 1. Tests of controls and extensive tests of property and equipment balances at the end of the year. 2. Analytical procedures for current-year property and equipment transactions. 3. Tests of controls and limited tests of current-year property and equipment transactions. 4. Analytical procedures for property and equipment balances at the end of the year.

3. Tests of controls and limited tests of current-year property and equipment transactions.

Which of the following types of evidence would an auditor most likely consider to determine whether internal controls are operating effectively? 1. Confirmations of receivables verifying account balances. 2. A management representation letter corroborating inventory pricing. 3. Attorneys' responses to the auditor's inquiries. 4. A questionnaire completed by an employee in the receiving department concerning her duties and responsibilities.

4. A questionnaire completed by an employee in the receiving department concerning her duties and responsibilities.

An auditor may compensate for a high assessed risk of material misstatement by 1. Increasing the acceptable level of detection risk. 2. Eliminating tests of controls. 3. Decreasing the preliminary judgment about audit risk. 4. Increasing the extent of substantive analytical procedures.

4. Increasing the extent of substantive analytical procedures.

A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this control activity? 1. Ask the chief technology officer about known problems. 2. Obtain a list of current data center employees. 3. Inspect the policy manual establishing this control activity. 4. Observe whether the data center is monitored.

4. Observe whether the data center is monitored.

Which of the following computer-assisted auditing techniques processes client input data on a controlled program under the auditor's control to test controls in the computer system? 1. Test data. 2. Integrated test facility. 3. Review of program logic. 4. Parallel simulation.

4. Parallel simulation.

The portion of the audit plan for a financial statement audit that describes further audit procedures usually cannot be developed until the 1. Engagement letter has been signed by the auditor and the client. 2. Search for unrecorded liabilities has been performed and documented. 3. Significant control deficiencies have been communicated to those charged with governance. 4. Understanding of the entity's internal control has been completed.

4. Understanding of the entity's internal control has been completed.

Ronnie, a CPA, is planning an audit engagement for a client. He expects that tests of controls are unnecessary and therefore performs substantive tests only. Which section of the generally accepted auditing standards requires the auditor to perform tests of controls under certain circumstances? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.

AU-C 330.08

Which of the following procedures is not used in tests of controls over purchases? 1. Confirm inventory held in public warehouses. 2. Examine vouchers and supporting documents for authorization. 3. Trace vouchers to entries in the vouchers register. 4. Reperform calculations on some supporting documentation.

1. Confirm inventory held in public warehouses.

An auditor who decides not to rely on controls should 1. Document the further audit procedures performed. 2. Perform fewer tests of details. 3. Document controls more extensively. 4. Perform more tests of controls.

1. Document the further audit procedures performed.

When an auditor increases the assessment of the risks of material misstatement because certain controls were determined to be ineffective, the auditor will most likely increase the 1. Extent of tests of details. 2. Assessed inherent risk. 3. Extent of tests of controls. 4. Acceptable detection risk.

1. Extent of tests of details.

When controls are ineffective, a [1] assessed risk of material misstatement requires the auditor to obtain a [2] level of assurance by performing further audit procedures at the assertion level. Evidence about the effectiveness of the operation of controls obtained [3] by the auditor usually provides more assurance than evidence obtained [4]. A [5] assessment of the risks of material misstatement reduces the audit effort applied to substantive procedures. When various types of evidence support the same conclusion, the degree of assurance provided is usually [6] than when only one type of evidence supports the conclusion. When the auditor determines that a specific control may have a significant effect on the assessment of the RMMs, (s)he usually needs to perform testing with a [7] degree of assurance instead of relying on inquiries alone. A [8] degree of subjectivity in a financial measure results in more risk for the auditor. Some controls [9] affect an assertion, which may make them important for the auditor to test. The audit effort applied to tests of controls is likely to be [10] when the auditor does not rely on controls.

1. Higher 2. Higher 3. Directly 4. Indirectly 5. Lower 6. Higher 7. Higher 8. Higher 9. Directly 10. Lower

1. The client began purchasing inventory from a major stockholder. 2. The client changed insurance carriers because the rates were more favorable. 3. Two members of the client's audit committee resigned. 4. The client added to the staff of the internal auditors. 5. The client settled a major legal case involving a patent for one of its major products. 6. The client delegated the collections of receivables to a bank by using a lockbox system. 7. The client changed from paying payroll every 2 weeks to twice a month. 8. The client changed the useful lives for equipment depreciation to better match the physical lives.

1. Increase 2. No change 3. Increase 4. Decrease 5. Decrease 6. Decrease 7. No change 8. No change

1. The client has negotiated several asset purchases from a major shareholder. 2. The client has initiated a significant advertising campaign during the year. 3. The client changed policies to require purchases and sales of securities to be approved by the board of directors. 4. The client began trading in derivatives in a hedging arrangement. 5. The client replaced a number of machines in the factory during the year. 6. The client instituted a policy that all employees must take an annual vacation. 7. The client changed a policy that results in the internal auditors reporting to the audit committee rather than the CEO. 8. The client is planning to factor its accounts receivable because of a reduction of a credit line by the bank. 9. The client continues to pay bonuses to sales personnel based on their sales performance. 10. Several of the client's competitors have exited the market, leaving the client as the market leader.

1. Increases the risk of material misstatment 2. No substantive change in the risk of material misstatement 3. Decreases the risk of material misstatement 4. Increases the risk of material misstatement 5. No substantive change in the risk of material misstatement 6. Decreases the risk of material misstatement 7. Decreases the risk of material misstatement 8. Increases the risk of material misstatment 9. No substantive change in the risk of material misstatement 10. Decreases the risk of material misstatement

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control? 1. Make inquiries to understand the potential consequence of the deviation. 2. Increase the sample size of tests of controls. 3. Report the matter to the next higher level of authority within the entity. 4. Assume that the deviation is an isolated occurrence without audit significance.

1. Make inquiries to understand the potential consequence of the deviation.

Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls? 1. Observing an entity's employee prepare the schedule of past due accounts receivable. 2. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable. 3. Inspecting an entity's analysis of accounts receivable for unusual balances. 4. Comparing an entity's uncollectible accounts expense with actual uncollectible accounts receivable.

1. Observing an entity's employee prepare the schedule of past due accounts receivable.

A journal entry was made by the controller on December 31, Year 2: Dr. Salaries and wages expense Cr. Accrued liabilities Explanation: To account for compensation for Year 2 to be paid in Year 3. A journal entry was made by the fixed asset manager on December 31, Year 2: Dr. Accumulated depreciation Cr. Depreciation expense Explanation: To adjust machine's depreciation expense. A journal entry was made by the controller on December 30, Year 2: Dr. Investments held for trading purposes Cr. Investments held-to-maturity Explanation: Change in asset classification. A journal entry was made by the controller on January 1, Year 2: Dr. Repairs and maintenance Cr. Accounts payable Explanation: To record the proposed audit adjustments from Year 1. A journal entry was made by the controller on December 31, Year 2: Dr. Investment in stock Cr. Investment income Explanation: Record subsidiary income for Year 2.

1. Obtain management's bonus plan and eligibleemployee list and recalculate expense 2. Confirm with the controller any changes in estimate 3. Review board minutes for change in classification of long-lived assets 4. Propose adjusting entry to debit prio-year retained earnings 5. obtain financial statement of subsidiary

Which of the following best represents a key control for ensuring sales are properly authorized when assessing risks of material misstatement for sales? 1. Sales orders are sent to the credit department for approval. 2. The use of an approved price list to determine unit selling price. 3. The segregation of duties between the billing department and the cash receipts approval department. 4. Copies of approved sales orders sent to the shipping, billing, and accounting departments.

1. Sales orders are sent to the credit department for approval.

The auditor should perform tests of controls when the auditor's assessment of the risks of material misstatement includes an expectation of the operating effectiveness of internal control or when 1. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level. 2. Tests of details and substantive analytical procedures provide sufficient appropriate audit evidence to support the assertion being evaluated. 3. The auditor is not able to obtain an understanding of internal controls. 4. The owner-manager performs virtually all the functions of internal control.

1. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level.

1. Inspection of purchase orders for the authorization of the purchasing agent 2. Observation of an employee's preparation of a daily deposit slip 3. Confirmation of accounts receivable with debtors 4. Inspection of the personal financial statements of the CEO and CFO 5. Observation of the taking of the physical inventory 6. Inquiries of management concerning the assigned responsibilities of employees 7. Attempts to sign onto the computer system using various passwords 8. Comparisons of financial ratios with those of industry averages 9. Comparison of the accounts receivable subsidiary ledger with the general ledger 10. Recalculation of time approved on a sample of time cards

1. Test of controls 2. Test of controls 3. Substantive test 4. Neither 5. Substantive test 6. Test of controls 7. Test of controls 8. Substantive test 9. Substantive test 10. Test of controls

After gaining an understanding of a client's computer processing internal control, a financial statement auditor may decide not to test the effectiveness of the computer processing control procedures. Which of the following is not a valid reason for choosing to omit tests of controls? 1. The assessment of the risks of material misstatement permits the auditor to rely on the controls. 2. Risk assessment procedures have not identified relevant effective controls. 3. The controls duplicate operative controls existing elsewhere in the system. 4. The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests of controls show the controls to be effective.

1. The assessment of the risks of material misstatement permits the auditor to rely on the controls.

In parallel simulation, actual client data are reprocessed using an auditor software program. An advantage of using parallel simulation, instead of performing tests of controls without a computer, is that 1. The size of the sample can be greatly expanded at relatively little additional cost. 2. The test includes all types of transaction errors and exceptions that may be. 3. There is no risk of creating potentially material errors in the client's data. 4. The client's computer personnel do not know when the data are being tested.

1. The size of the sample can be greatly expanded at relatively little additional cost.

The auditor of a nonissuer would most appropriately use reperformance to obtain audit evidence for which of the following purposes? 1. To test the operating effectiveness of a bank reconciliation control. 2. To test whether the amount of FICA tax withheld from an employee's paycheck is appropriate. 3. To determine whether the aging categories on the aged accounts payable trial balance are accurate. 4. To determine the mathematical accuracy of the extended cost amount shown on an invoice sent to a customer.

1. To test the operating effectiveness of a bank reconciliation control.

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? 1. Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box. 2. The investment committee of the board of directors periodically reviews the investment decisions delegated to the CFO. 3. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger. 4. The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date.

1. Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.

1. A methodology that is not appropriate when systems are sophisticated or the major controls are included in the computer programs. 2. The auditor prepares a set of dummy transactions specifically designed to test the control activities that management claims to have incorporated into the processing programs.​ 3. The inappropriate duty assigned to the IT function.​ 4. The auditor attempts to sign on to the computer system using various passwords and ID numbers.​ 5. Controls that relate to the client's input, processing, and output. 6. The auditor uses a controlled program to reprocess sets of client transactions and compares the auditor-​achieved results with those of the client. 7. The auditor should test first. 8. The auditor inspects this to determine whether it is complete and up to date. 9. A methodology that uses the computer to test the processing logic and controls within the system and the records produced. 10. May be included in the payroll processing program.

1.Auditing around the computer 2. Test data approach 3. Asset custody 4. Test of access controls 5. Application controls 6. Parallel simulation 7. General controls 8. Program documentation 9. Auditing through the computer 10. Reasonableness test

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the 1. Internal auditor to investigate the listing for unusual transactions. 2. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. 3. Treasurer to compare the listing with the monthly bank statement. 4. Entity's bank to compare the listing with the cashier's deposit slip.

2. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

The major purpose of the auditor's study and evaluation of the company's computer processing operations is to 1. Become familiar with the company's means of identifying, measuring, classifying, and reporting information. 2. Evaluate the reliability and integrity of financial information. 3. Evaluate the competence of computer processing operating personnel. 4. Ensure the exercise of due professional care.

2. Evaluate the reliability and integrity of financial information.

To obtain evidence that user identification and password controls are functioning as designed, an auditor should 1. Review the online transaction log to ascertain whether employees using passwords have access to data files and computer programs. 2. Examine a sample of password holders and access authority to determine whether they have access authority incompatible with their other responsibilities. 3. Extract a random sample of processed transactions and ensure that transactions are appropriately authorized. 4. Observe the file librarian's activities to discover whether other systems personnel are permitted to operate computer equipment without restriction.

2. Examine a sample of password holders and access authority to determine whether they have access authority incompatible with their other responsibilities.

Determining that controls are operating effectively most likely involves 1. Changing the timing of substantive procedures by omitting interim-date testing and performing the tests at year-end. 2. Identifying specific controls relevant to specific assertions. 3. Reducing inherent risk for most of the assertions relevant to significant account balances. 4. Performing more extensive substantive tests with larger sample sizes than originally planned.

2. Identifying specific controls relevant to specific assertions.

The ultimate purpose of understanding the entity and its environment and assessing the risks of material misstatement is to contribute to the auditor's assessment of the risk that 1. Tests of controls may fail to identify procedures relevant to assertions. 2. Material misstatements may exist in the financial statements. 3. Specified controls requiring segregation of duties may be circumvented by collusion. 4. Entity policies may be inappropriately overridden by senior management.

2. Material misstatements may exist in the financial statements.

Audit evidence concerning undocumented monitoring controls ordinarily is best obtained by 1. Performing tests of transactions that corroborate management's financial statement assertions. 2. Observing the employees as they apply controls. 3. Developing audit objectives that reduce control risk. 4. Obtaining a flowchart of activities performed by available personnel.

2. Observing the employees as they apply controls.

The following flowchart depicts - Transaction File - Master File - Client's Program - Output - Compare - Exceptions Report - Auditor's Program - Output - Compare - Exceptions Report 1. Program code checking. 2. Parallel simulation. 3. Integrated test facility. 4. Test data approach.

2. Parallel simulation.

In a computerized payroll system environment, an auditor is least likely to use test data to test controls related to 1. Missing employee numbers. 2. Proper approval of overtime by supervisors. 3. Agreement of hours per clock cards with hours on time tickets. 4. Time tickets with invalid job numbers.

2. Proper approval of overtime by supervisors.

To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including 1. Inquiry and analytical procedures. 2. Reperformance and observation. 3. Comparison and confirmation. 4. Inspection and verification.

2. Reperformance and observation.

To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including 1. Inspection and verification. 2. Reperformance and observation. 3. Inquiry and analytical procedures. 4. Comparison and confirmation.

2. Reperformance and observation.

An auditor who is testing computer controls in a payroll system will most likely use test data that contain conditions such as 1. Deductions not authorized by employees. 2. Time tickets with invalid job numbers. 3. Overtime not approved by supervisors. 4. Payroll checks with unauthorized signatures.

2. Time tickets with invalid job numbers.

Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of controls. One of the techniques involved in this approach makes use of 1. Input validation. 2. Program code checking. 3. An integrated test facility. 4. Controlled reprocessing.

3. An integrated test facility.

To obtain evidence that online access controls are properly functioning, an auditor most likely will 1. Create checkpoints at periodic intervals after live data processing to test for unauthorized use of the system. 2. Examine the transaction log to discover whether any transactions were lost or entered twice because of a system malfunction. 3. Enter invalid identification numbers or passwords to ascertain whether the system rejects them. 4. Vouch a random sample of processed transactions to assure proper authorization.

3. Enter invalid identification numbers or passwords to ascertain whether the system rejects them.

The objective of tests of details of transactions performed as tests of controls is to 1. Determine whether internal controls have been implemented. 2. Monitor the design and use of entity documents such as prenumbered shipping forms. 3. Evaluate whether internal controls operated effectively. 4. Detect material misstatements in the account balances of the financial statements.

3. Evaluate whether internal controls operated effectively.

Which of the following tests of controls most likely will help assure an auditor that goods shipped are properly billed? 1. Inspect unused sales invoices for consecutive prenumbering. 2. Scan the sales journal for sequential and unusual entries. 3. Examine shipping documents for matching sales invoices. 4. Compare the accounts receivable ledger to daily sales summaries.

3. Examine shipping documents for matching sales invoices.

The risks of material misstatement (RMMs) should be assessed in terms of 1. Specific controls. 2. Types of potential fraud. 3. Financial statement assertions. 4. Control environment factors.

3. Financial statement assertions.

Which of the following statements is false about the integrated test facility (ITF) method for testing a computerized accounting system? 1. ITF tests the actual program in operation. 2. The test transactions may be submitted without the computer operator's knowledge. 3. ITF reprocesses only actual, not fictitious, transactions. 4. The ITF method is also known as the minicompany technique.

3. ITF reprocesses only actual, not fictitious, transactions.

Which of the following is a step in an auditor's decision to rely on internal controls? 1. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. 2. Perform tests of details of transactions and account balances to identify potential fraud and error. 3. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls. 4. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

3. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls.

To obtain evidence about the operating effectiveness of controls, an auditor selects tests from a variety of methods, including 1. External confirmations. 2. Analytical procedures. 3. Inquiries. 4. Calculations.

3. Inquiries.

Which of the following combinations of audit procedures provides the least assurance? 1. Inquiry and reperformance. 2. Inquiry and inspection. 3. Inquiry and observation. 4. Inquiry and recalculation.

3. Inquiry and observation.

Which of the following may imply that internal controls are ineffective? 1. Extensive documentation exists for controls. 2. A significant change in controls since they were last tested. 3. Misstatements detected by analytical procedures. 4. A reduced need for substantive analytical procedures.

3. Misstatements detected by analytical procedures.

For certain controls, such as assignment of authority and responsibility, documentary evidence may not exist. An auditor would most likely test the controls by 1. Confirmation and recomputation. 2. Computer-assisted methods and corroboration. 3. Observation and inquiry. 4. Inspection and vouching.

3. Observation and inquiry.

A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this control activity? 1. Inspect the policy manual establishing this control activity. 2. Ask the chief technology officer about known problems. 3. Observe whether the data center is monitored. 4. Obtain a list of current data center employees.

3. Observe whether the data center is monitored.

What is the most likely course of action that an auditor would take after determining that performing substantive procedures on inventory will take less time than performing tests of controls? 1. Perform only tests of controls on inventory. 2. Perform both tests of controls and substantive procedures on inventory. 3. Perform only substantive procedures on inventory. 4. Rely on the controls.

3. Perform only substantive procedures on inventory.

JP Industries conducts its business using IT, and the only documentation of transactions is produced through the IT system. The auditor has concluded that it is not possible to obtain sufficient appropriate audit evidence by performing only substantive procedures for a number of financial statement assertions. The auditor's alternative strategy is to 1. Require management to change its information system to provide appropriate evidence. 2. Increase the acceptable audit risk. 3. Perform tests of controls. 4. Focus audit tests on other assertions for which substantive procedures prove to be effective.

3. Perform tests of controls.

After obtaining an understanding of internal control for the audit of a nonissuer's financial statements, an auditor decided not to perform tests of controls. The auditor most likely decided that 1. The assessed inherent risk exceeded the assessed control risk. 2. The available evidence obtained through tests of controls would not support higher assessed risks of material misstatement. 3. Performing only substantive procedures would effectively reduce audit risk to an acceptably low level. 4. A reduction in the assessed risks of material misstatement is justified for certain financial statement assertions.

3. Performing only substantive procedures would effectively reduce audit risk to an acceptably low level.

A client maintains perpetual inventory records in both quantities and dollars. If the assessment of the risks of material misstatement is high, an auditor will probably 1. Apply gross profit tests to ascertain the reasonableness of the physical counts. 2. Increase the extent of tests of controls relevant to the inventory cycle. 3. Request the client to schedule the physical inventory count at the end of the year. 4. Insist that the client perform physical counts of inventory items several times during the year.

3. Request the client to schedule the physical inventory count at the end of the year.

The auditor should perform tests of controls when the auditor's assessment of the risks of material misstatement includes an expectation of the operating effectiveness of internal control or when 1. The auditor is not able to obtain an understanding of internal controls. 2. Tests of details and substantive analytical procedures provide sufficient appropriate audit evidence to support the assertion being evaluated. 3. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level. 4. The owner-manager performs virtually all the functions of internal control.

3. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level.

Which of the following statements concerning the parallel simulation approach when testing a computerized accounting system is false? 1. Transactions from throughout the period may be reprocessed. 2. Only real, not fictitious, transactions are reprocessed. 3. Transactions are reprocessed only by the client's computer programs. 4. It tends to be a very costly method.

3. Transactions are reprocessed only by the client's computer programs.

When assessing the risks of material misstatement at a low level, an auditor is required to document the auditor's 1. Understanding of the Entity's Control Environment - Yes Overall Responses to Assessed Risks - No 2. Understanding of the Entity's Control Environment -No Overall Responses to Assessed Risks - Yes 3. Understanding of the Entity's Control Environment - Yes Overall Responses to Assessed Risks - Yes 4. Understanding of the Entity's Control Environment - No Overall Responses to Assessed Risks - No

3. Understanding of the Entity's Control Environment - Yes Overall Responses to Assessed Risks - Yes

Which of the following procedures is considered a test of controls? 1. An auditor reviews the entity's check register for unrecorded liabilities. 2. An auditor reviews the audit working papers to ensure proper sign-off. 3. An auditor evaluates whether a general journal entry was recorded at the proper amount. 4. An auditor interviews and observes appropriate personnel to determine segregation of duties.

4. An auditor interviews and observes appropriate personnel to determine segregation of duties.

Which of the following types of evidence should an auditor most likely examine to determine whether internal controls are operating as designed? 1. Confirmations of receivables verifying account balances. 2. Anticipated results documented in budgets or forecasts. 3. Gross margin information regarding the client's industry. 4. Client records documenting the use of computer programs.

4. Client records documenting the use of computer programs.

The objective of tests of details of transactions performed as tests of controls is to 1. Monitor the design and use of entity documents such as prenumbered shipping forms. 2. Determine whether internal controls have been implemented. 3. Detect material misstatements in the account balances of the financial statements. 4. Evaluate whether internal controls operated effectively.

4. Evaluate whether internal controls operated effectively.

Which of the following levels would most likely address the risk of material misstatement by the auditor's consideration of an entity's control environment? 1. Disclosures. 2. Classes of transactions. 3. Specific account balances. 4. Financial statements.

4. Financial statements.

Controls within the computer processing activity may leave no visible evidence indicating that they were implemented and were effective. In such instances, the auditor most likely would test these controls by 1. Making corroborative inquiries. 2. Observing the segregation of duties of personnel. 3. Reviewing the run manual. 4. Reviewing transactions submitted for processing and comparing them with related output.

4. Reviewing transactions submitted for processing and comparing them with related output.

After gaining an understanding of a client's computer processing internal control, a financial statement auditor may decide not to test the effectiveness of the computer processing control procedures. Which of the following is not a valid reason for choosing to omit tests of controls? 1. The controls duplicate operative controls existing elsewhere in the system. 2. Risk assessment procedures have not identified relevant effective controls. 3. The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests of controls show the controls to be effective. 4. The assessment of the risks of material misstatement permits the auditor to rely on the controls.

4. The assessment of the risks of material misstatement permits the auditor to rely on the controls.

In parallel simulation, actual client data are reprocessed using an auditor software program. An advantage of using parallel simulation, instead of performing tests of controls without a computer, is that 1. The test includes all types of transaction errors and exceptions that may be encountered. 2. The client's computer personnel do not know when the data are being tested. 3. There is no risk of creating potentially material errors in the client's data. 4. The size of the sample can be greatly expanded at relatively little additional cost.

4. The size of the sample can be greatly expanded at relatively little additional cost.

Which of the following statements is not true of the test data approach to testing an accounting system? 1. Test data are processed by the client's computer programs under the auditor's control. 2. The test data need consist of only those valid and invalid conditions that interest the auditor. 3. Only one transaction of each type need be tested. 4. The test data must consist of all possible valid and invalid conditions.

4. The test data must consist of all possible valid and invalid conditions.

While performing interim audit procedures on accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? 1. Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. 2. Increase the dollar threshold of vouching customer invoices. 3. Move detailed analytical procedures from year end to an interim date. 4. Use more experienced audit team members to perform year-end testing.

4. Use more experienced audit team members to perform year-end testing.

Key engagement team members should discuss the susceptibility of the financial statements to material misstatement. Which section of the generally accepted auditing standards requires this discussion as part of the risk assessment process during audit planning? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.

AU-C 315.11

Marion has assessed the risk of material misstatement as medium for a relevant assertion in an audit of financial statements of a nonissuer. The application of substantive procedures will be difficult for testing this assertion. What section of the generally accepted auditing standards should Marion consider when deciding whether to forgo the substantive procedures? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.

AU-C 330.18