Asset and Assurance Chapter 13
In accumulating final evidence upon which to base an audit opinion, the auditor should perform four activities. List the activities below. LO 13-7
1. Perform final analytical procedures 2. Evaluate the going concern assumption 3. Obtain a client representation letter 4. Read information in the annual report to ensure that it is consistent with the financial statements
A) Procedures to obtain an understanding of internal control Test of details of balances Analytical Procedures Yes Yes No B) Procedures to obtain an understanding of internal control Test of details of balances Analytical Procedures Yes No No C) Procedures to obtain an understanding of internal control Test of details of balances Analytical Procedures No Yes Yes D) Procedures to obtain an understanding of internal control Test of details of balances Analytical Procedures No No Yes
A) Procedures to obtain an understanding of internal control Test of details of balances Analytical Procedures Yes Yes No B) Procedures to obtain an understanding of internal control Test of details of balances Analytical Procedures Yes No No
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) Substantive tests of transactions LO 13-2
A) Analytical procedures
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 is placed on the controls. B) Relatively little emphasis is placed on the controls. C) Moderate emphasis is placed on the controls. D) Heavy emphasis is placed on the controls. LO 13-1
A) No emphasis is placed on the controls.
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 LO 13-7
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 general ledger balances for both balance sheet and income statement accounts. B) Tests of details of balances focus on the transactions during the period for both balance sheet and income statement accounts. 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. LO 13-1
A) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts.
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 LO 13-2
A) The difficulty and expense involved in testing a particular item
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. LO 13-7
A) They are likely to be performed prior to the clients end of the fiscal year.
A major part of the auditor's risk assessment procedures is done to obtain an understanding of internal control. A) True B) False LO 13-1
A) 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 LO 13-2
A) 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 LO 13-1
A) True
Analytical procedures are the least costly type of audit test. A) True B) False LO 13-2
A) 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 LO 13-3
A) True
Auditing standards require a written audit program. A) True B) False LO 13-5
A) True
Auditors must use considerable professional judgment to determine any change in audit procedures that can be made when the level of inherent risk is increased or decreased. A) True B) False LO 13-5
A) True
Auditors use analytical procedures and tests of details of balances to satisfy planned detection risk. A) True B) False LO 13-1
A) True
In the audit of a public company, automated 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 LO 13-3
A) True
Once auditors determine an automated control is functioning properly, they can focus subsequent tests on assessing whether any changes have occurred that will limit the effectiveness of the control. A) True B) False LO 13-3
A) True
Only tests of details of balances involve physical examination and confirmation. A) True B) False LO 13-2
A) True
Substantive tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances. A) True B) False LO 13-1
A) True
Substantive tests of transactions and control tests are often conducted simultaneously. A) True B) False LO 13-5
A) True
Tests of controls are generally more costly to perform than analytical procedures. A) True B) False LO 13-2
A) True
Tests of controls provide evidence about the likelihood for misstatements in a client's financial statements. A) True B) False LO 13-2
A) True
The auditor's understanding of internal control performed as part of risk assessment procedures provides the basis for the auditor's initial assessment of control risk. A) True B) False
A) 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 LO 13-2
A) 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 LO 13-5
A) True
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. LO 13-1
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. LO 13-1
A) determine the risk of material misstatement in the financial statements.
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. LO 13-2
A) other substantive tests may be reduced.
If tests of controls support the control risk assessment, then ________ in the audit risk model is increased. A) planned detection risk. B) planned inherent risk. C) planned fraud risk. D) planned assurance risk. LO 13-2
A) planned detection risk.
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. 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. LO 13-1
B) 3, 4, and 5. 3. Tests of transactions 4. Substantive analytical procedures 5. Tests of details of balances
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 effectiveness of controls over revenue and cash LO 13-2
B) Analytical procedures
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 LO 13-6
B) Confirmation
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 LO 13-7
B) Contingent liabilities and subsequent events
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 LO 13-2
B) False
Auditors must perform tests of controls separately from substantive tests of transactions. A) True B) False LO 13-1
B) False
Because of the high cost of tests of details of balances, auditors do not perform this type fo testing unless fraud is suspected. A) True B) False LO 13-2
B) False
If all transaction-related audit objectives are met, the auditor does not need to perform substantive tests of balances to determine realizable value. A) True B) False LO 13-6
B) False
If inherent risk is increased to medium from low, tests of details of balances can be reduced. A) True B) False LO 13-2
B) False
If internal controls are tested and are considered effective, the auditor generally will increase both substantive tests of transactions and tests of details of balances. A) True B) False
B) False
Procedures to obtain an understanding of internal control generally provide sufficient appropriate evidence that a a control is operating effectively. A) True B) False LO 13-1
B) False
Tests of controls are performed to support a reduced assessment of detection risk. A) True B) False LO 13-1
B) False
Tests of controls should be performed after substantive tests of transactions. A) True B) False LO 13-1
B) 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 LO 13-7
B) False
The choice of which types of tests to use and how extensively they need to be performed must be the same for all audits. A) True B) False
B) False
The evidence mix includes risk assessment procedures. A) True B) False LO 13-4
B) 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 LO 13-2
B) 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 LO 13-5
B) False
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. LO 13-5
B) Identify accounts that have high inherent risk.
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 LO 13-7
B) Perform audit tests for controls and transactions
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. LO 13-1
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 LO 13-7
B) Tests of the signatures on canceled checks to board of directors' authorizations
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 LO 13-7
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 LO 13-2
B) The likelihood of the misstatement
The document that details the specific audit procedures for each type of test is the: A) audit strategy. B) audit program. C) audit procedure. D) audit risk model. LO 13-5
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 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. LO 13-1
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 LO 13-7
B) completeness and accuracy
Tests of controls are directed toward the control's: A) efficiency. B) effectiveness. C) cost and effectiveness. D) cost benefit ratio. LO 13-1
B) effectiveness.
An exception or deficiency found in a test of controls: A) indicates a financial statement misstatement. B) indicates the likelihood of a misstatement. C) indicates that the financial statements are fairly stated. D) indicates that an adverse opinion is warranted on the audit of internal control LO 13-2
B) indicates the likelihood of a misstatement.
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. LO 13-1
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. LO 13-2
B) inverse.
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. LO 13-1
B) substantive test.
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 LO 13-7
C) Perform analytical procedures and tests of balances
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 LO 13-4
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 of transactions D) Preliminary analytical procedures LO 13-1
C) Substantive tests of transactions
Which audit tests involve physical examination and confirmation? A) Tests of controls B) Tests of transactions C) Tests of balances D) Analytical procedures LO 13-6
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 LO 13-7
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 LO 13-1
C) Tests of details of balances
When designing the audit program and the particular audit tests, the auditor should keep in mind that: A) the audit program is broken down into two parts-the risk assessment procedures and the tests of details of balances. B) the tests of controls will not vary depending on assessed control risk. C) analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning. D) auditing standards require that the tests contained in the audit program must be approved by the PCAOB. LO 13-5
C) analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning.
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. LO 13-1
C) are designed to test for dollar misstatements.
Auditors who test manual controls that rely on IT-generated reports must consider: A) the effectiveness of management's review. B) automated controls over the accuracy of information in the report. C) both A and B D) neither A or B. LO 13-3
C) both A and B
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. LO 13-2
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 are in place. D) determine whether the audit engagement should be accepted. LO 13-1
C) determine whether internal controls are in place.
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. LO 13-1
C) risk assessment procedures.
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. LO 13-7
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. LO 13-1
C) they indicate areas of potential risk and misstatement.
When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would: A) Perform additional tests of controls Decide to modify tests of details of balances Yes Yes B) Perform additional tests of controls Decide to modify tests of details of balances No No C) Perform additional tests of controls Decide to modify tests of details of balances Yes No D) Perform additional tests of controls Decide to modify tests of details of balances No Yes
D) Perform additional tests of controls Decide to modify tests of details of balances No Yes
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 LO 13-7
D) Complete the audit and issue the audit report
Which of the following would not be considered further audit procedures? A) Tests of controls B) Analytical procedures C) Tests of details of balances D) Risk assessment procedures LO 13-1
D) Risk assessment procedures
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 LO 13-2
D) Tests of details of balances
What type of test is used to obtain the most types of evidence? A) Substantive tests of transactions B) Tests of controls C) Risk assessment tests D) Tests of details of balances LO 13-6
D) Tests of details of balances
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 LO 13-1
D) Tests of details of balances
Analytical procedures: A) involve comparisons of recorded amounts to expectations developed by management. 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. LO 13-1
D) provide substantive evidence.
Which of the following types of procedures will be performed in an audit of internal control over financial reporting? A) Procedures to obtain an understanding of internal control Ratio analysis Yes Yes B) Procedures to obtain an understanding of internal control Ratio analysis No No C) Procedures to obtain an understanding of internal control Ratio analysis Yes No D) Procedures to obtain an understanding of internal control Ratio analysis No Yes LO 13-6
Procedures to obtain an understanding of internal control Ratio analysis Yes No
