Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 13 Overall Audit Strategy and Audit Program
13.1 Learning Objective 13-1
1) Shown below (1 through 5) are the five types of tests which auditors use to determine whether
financial statements are fairly stated. Which three are substantive tests?
1. risk assessment procedures
2. tests of controls
3. substantive tests of transactions
4. substantive analytical procedures
5. tests of details of balances
A) 1, 2, and 3
B) 3, 4, and 5
C) 2, 3, and 5
D) 2, 3, and 4
2) 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.
3) 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
4) 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
5) 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
6) 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.
7) 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.
8) 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.
9) 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.
10) A system walkthrough is primarily used to help the auditor
A) test the ending account balances.
B) test the details of transactions.
C) determine whether internal controls have been properly implemented.
D) determine whether the audit engagement should be accepted.
11) 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.
12) Tests of controls are directed toward the control’s
A) efficiency.
B) effectiveness.
C) cost and effectiveness.
D) cost benefit ratio.
13) 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.
14) Analytical procedures
A) focus on the ending balances for income statement accounts.
B) are only performed during the planning stage of the audit.
C) are required to be performed when auditing an account balance.
D) provide substantive evidence.
15) 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.
16) 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.
17) Many auditors perform extensive analytical procedures 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.
18) The auditor has determined that a key control in the audit of the sales and collection cycle is
that recorded sales are supported by authorized shipping documents and approved customer
orders. What typical test of controls should be used in this situation?
A) Examine a sample of duplicate sales invoices to determine that each on is supported by an
authorized shipping document and approved customer order.
B) Observe whether shipping documents are forwarded daily to billing and observe when they
are billed.
C) Examine a sample of sales invoices and agree prices to the authorized computer price list.
D) Use audit software to trace postings from the batch of sales transactions to the subsidiary and
general ledgers.
19) 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
20) List each of the five types of audit tests.
21) Describe the five types of audit tests. Identify which of the five types are substantive tests,
and which are used to reduce assessed control risk.
22) Discuss the purposes of (1) substantive tests of transactions, (2) tests of controls, and (3) tests
of details of balances. Give an example of each.
23) There are three stages of the audit in which analytical procedures are performed. Identify
each of these three stages and, for each stage, discuss the purpose of performing analytical
procedures in that stage. Also indicate in which stage(s) analytical procedures are required by
current professional auditing standards.
24) For automated controls, the auditor’s procedures to determine whether the automated control
has been implemented cannot also serve as the test of that control.
25) Procedures to obtain an understanding of internal control generally provide sufficient
appropriate evidence that a control is operating effectively.
26) Substantive tests are procedures designed to test for dollar misstatements that directly affect
the correctness of financial statement balances.
27) Risk assessment procedures are performed to assess the risk of material misstatement in the
financial statements.
28) Tests of controls should be performed after substantive tests of transactions.
29) Tests of details of balances emphasize the overall reasonableness of transactions and the
general ledger balances.
30) Auditors must perform tests of controls separately from substantive tests of transactions.
31) One factor that determines the amount of additional evidence required for tests of controls is
the planned reduction in control risk.
32) Tests of controls are performed to support a reduced assessment of detection risk.
13.2 Learning Objective 13-2
1) In order to promote audit efficiency the auditor considers cost in selecting audit tests to
perform. Which of the following audit tests would be the most costly?
A) substantive analytical procedures
B) risk assessment procedures
C) tests of controls
D) tests of details of balances
2) 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.
3) 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.
4) Which of the following audit tests is usually the least costly to perform?
A) substantive analytical procedures
B) tests of controls
C) tests of balances
D) substantive tests of transactions
5) 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.
6) 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
7) 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
8) The auditor would design which of the following audit tests to detect possible monetary errors
in the financial statements?
A) control tests
B) substantive analytical procedures
C) risk assessment procedures
D) tests of operating effectiveness of controls over revenue and cash
9) 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.
10) 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
11) Several factors influence the auditor’s choice of the types of tests to select, including
A) the availability of the types of evidence.
B) the relative costs of each type of test.
C) the effectiveness of the internal controls.
D) all of the above.
12) There are eight types of audit evidence: physical examination, confirmation, inspection,
observation, inquiries of the client, reperformance, analytical procedures, and recalculation. For
each of the following types of audit tests, indicate the type(s) of evidence that can be obtained
through the test: (1) tests of controls, (2) substantive tests of transactions, (3) analytical
procedures, and (4) tests of details of balances.
13) Tests of controls are generally more costly to perform than analytical procedures.
14) Only tests of details of balances involve physical examination and confirmation.
15) Analytical procedures are the least costly type of audit test.
16) In a computerized environment, the auditor can often perform substantive tests of
transactions quickly for a large sample of transactions.
17) The cost of each type of evidence does not vary in different situations.
18) Because of the high cost of tests of details of balances, auditors do not perform this type of
testing unless fraud is suspected.
19) 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.
20) Analytical procedures are the most expensive type of audit test to perform because of the
expertise and training required to properly use them.
21) The results of tests of controls and substantive tests of transactions affect the design of tests
of details of balances.
22) 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.