Module 9 & 10 Quiz

Once controls have been tested, ____

the auditors document their work in a working paper

Heather is the audit manager for Berrty & Heider Auditing Firm. Berry & Heider is planning an audit of Sparkit's financial statements. What is Heather's first step in determining which controls to test?

Heather should start by understanding the entity and the business, and by determining the risk of material fraud or error at the financial statement level.

An auditor asking the employee who prepares the bank reconciliation how reconciling items are identified would be an example of ___

Inquiry

An auditor is going to test the client's controls over bank reconciliations. The auditor will perform which of the following audit procedures for this test of controls?

Inquiry of the person performing the bank reconciliations and reperformance of the bank reconciliation procedure

John is preparing for an integrated audit of Utilhill, Inc. John will need to issue an opinion on the financial statements and on the internal controls over financial reporting (ICFR). Which of the following is correct in relation to the approach John should use and the report John should write?

John should use a top-down approach to determine which controls to test.

Based on prior experience, Jason and his auditing team, from Auditors of Dallas, are auditing the accounts payable controls of Devy Aeronautics. Devy processes 50,000 invoices annually. The expected deviation rate is 3%. The tolerable deviation rate is 15%. Due to the difference between the tolerable deviation rate and the expected deviation rate, Jason is planning a large sample size because the statistical variance is low. Is Jason correct regarding his test of controls?

No, because the greater the variance between the expected and tolerable deviation rates, Jason should use a smaller sample size.

The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow up by the billing supervisor. This is an example of a(n):

detective control

After the auditor has completed test of controls and drawn a conclusion about the control risk, ____

the auditor will want to make decisions about the nature, timing, and extent of substantive testing

During your audit of Paradigm Toys, your test of a control over revenue recognition shows that the control is ineffective. Explain what you should do next.

You should consider whether there is a compensating control that might detect and correct a misstatement missed by the original control being tested. If the test results do not confirm the preliminary evaluation of controls, the auditor will consider whether there is a compensating control that might detect and correct a misstatement missed by the original control being tested.

When performing tests of controls, the auditor is making _____

a "yes or no" with respect to effectiveness

Entity level controls involve ____

all five components of internal controls

Working papers:

document the auditor's conclusion about control risk and the basis for that conclusion

If tests of controls indicate that a key control is not functioning as designed, and if other compensating controls do not exist, the auditor should ___

increase the assessed level of control risk, decrease , decrease the level of assessed detection risk and make appropriate changes to the nature, timing, and extent of substantive tests related to the assertion

The expected rate of deviation in the population ___

is the rate at which the auditor expects controls not to function as planned.

Strong entity-level controls ____

make it more likely that transaction-level controls will operate effectively

IT General controls (ITGCs) are important because they

prevent unauthorized personnel from having access to data and applications.

A software application will not allow a sale to be processed if a customer is over its credit limit. This is an example of a(n):

preventative control

Working paper documentation for test of controls should include ____

the auditors' conclusion about control risk, and the basis for their conclusion (underlying evidence)

Once auditors understand the flow of transactions, _____

they will use their knowledge of assertions to understand what can go wrong.

If the auditor is auditing a public company in the US and must report on internal controls over financial reporting, the identification of one or more material weaknesses _____

will result in an adverse opinion on ICFR