10.2 Explain why determining evidence mix is a dynamic process
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
2) 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
3) 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
4) 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
5) 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.
6) Control risk has been assessed at 100% for your client. What audit approach will you follow?
A) combined approach.
B) substantive approach.
C) reliance on analytical review and tests of controls.
D) reliance on tests of controls and tests of details.
7) 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%.
8) 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
9) 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.
10) Symco Inc has a policy that all cash disbursements of $2,000 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 $3,500 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.
11) 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.
12) 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.
13) The auditor is deciding upon audit procedures to be used in the audit for a particular cycle
(i.e. what combination of the four types of tests are 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.
14) 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.
15) 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 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
16) 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.
17) The audit program for most audits is designed in three parts. Those 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.
18) A) There are seven types of audit evidence: inspection, observation, inquiries of the client,
external confirmation, recalculation, reperformance, analytical procedures. 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) analytical procedures, and (3) tests of details of balances.
B) Contrast the circumstances in which the auditor would choose not to test controls with those
in which he or she would perform tests of controls.
C) Types of audit tests include tests of controls, analytical procedures, and tests of details of
balances. Please rank the preceding three types of tests from least costly to most costly.
19) You are conducting the audit of a medium-sized company that has a chief accountant and
three employees. Segregation of duties is excellent, with jobs allocated to provide maximum
levels of controls. Segregation is supported by accounting software with user identification and
password that limits functions to the appropriate job.
Required:
A) What type of audit approach would you recommend? Why?
B) How would your answer change if the accounting department was organized on a job sharing
basis so that all employees did some of every task to keep the work more interesting? Why?
20) “This is really confusing! I’ve sat in on three audit planning meetings so far, and each one has
gone differently. I’ve been responsible for the sales section each time. Sure the risks are all
different, but in the first one I’m supposed to do flowcharts and detailed narrative for the sales
systems, in the second one I’m supposed to use the firm’s computerized system to answer
detailed questions, and in the last one the partner only wants a brief description of the system in
narrative form – no more than one page, he said.”
Required:
Explain why it may be necessary to do different types of documentation to support an
understanding of internal controls, in the context of risks and evidence mix.
10.3 Describe the methodology for designing tests of controls and tests of details in the audit
program
1) 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
2) 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.
3) 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
4) 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.
5) 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
6) Last year the materiality for the client was $590,000. This year it is $400,000. All things being
equal, how will the 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
7) 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.
8) 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.
9) 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 less tests of details as
they are more time consuming.
10) A standard audit program can dramatically increase
A) audit efficiency.
B) quality of audit evidence.
C) communication between the audit team.
D) the amount of work that can be delegated to more junior staff members.
11) Jane is a sole practitioner operating out of a local office. She is part of a regional group of
firms, and occasionally does a small audit, with the assistance of one staff person. Using
automated working paper software, she runs a standard set of analytical review calculations for
each audit, then puts them in the working paper file. She does not look at the analytical review
process again.
Since most of her audit clients have no internal controls, she then calculates materiality, and
conducts a substantive audit. She prefers to do more substantive testing rather than having to do
all kinds of work with internal controls.
Required:
What is wrong with Jane’s audit approach?
10.4 Describe the impact on the audit process of a client conversion to IFRS
1)
A)
B)
C)
D)