Assertions and Types of Audit Procedures Flashcards
The objective of tests of details of transactions performed as substantive procedures is to
Comply with generally accepted auditing standards.
Attain assurance about the reliability of the accounting system.
Detect material misstatements in the financial statements.
Evaluate whether management’s policies and procedures operated effectively.
Detect material misstatements in the financial statements.
The requirement is to identify the objective of tests of details of transactions performed as substantive procedures. Answer (c) is correct because AU-C 330 states that the objective of tests of details of transactions performed as substantive procedures is to detect material misstatements in the financial statements. Answer (a) is incorrect because while performing tests of details of transactions as substantive procedures complies with generally accepted auditing standards, this is not their objective. Answers (b) and (d) are incorrect because neither attaining assurance about the reliability of the accounting system nor the evaluation of the operating effectiveness of management’s policies and procedures are the objective of tests of details of transactions performed as substantive procedures.
Which of the following documents are examples of audit evidence generated by the client?
Customer purchase orders and bank statements.
Shipping documents and receiving reports.
Vendor invoices and packing slips.
Bills of lading and accounts receivable confirmations.
Shipping documents and receiving reports.
This answer is correct because shipping documents and receiving reports are client-generated.
Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?
Auditor judgment.
Materiality.
Relative risk.
Reasonable assurance.
Auditor judgment.
This answer is correct because the measure of the validity of evidence for audit purposes is based upon the judgment of the auditor. This audit judgment is used to estimate levels of materiality, and relative risk.
Which of the following is an analytical procedure that an auditor most likely would perform when performing the risk assessment of an audit?
Confirming bank balances with the financial institutions.
Scanning accounts receivable for amounts over credit limits.
Recalculating inventory extensions of physical inventory counts.
Comparing the current year account balances for conformity with predictable patterns.
Comparing the current year account balances for conformity with predictable patterns.
This answer is correct because analytical procedures performed during risk assessment are ordinarily at a high level and comparing current year balances for conformity with predictable patterns is such a test.
Which of the following procedures would a CPA most likely perform in the risk assessment stage of a financial statement audit?
Obtain representations from management regarding the availability of all financial records.
Communicate with the audit committee concerning the prior year’s audit adjustments.
Make inquiries of the client’s attorney regarding pending and threatened litigation and assessments.
Compare recorded financial information with anticipated results from budgets and forecasts.
Compare recorded financial information with anticipated results from budgets and forecasts.
This answer is correct because comparing recorded financial information with anticipated results from budgets and forecast is an analytical procedure often performed during risk assessment of the audit.
Which of the following is not a type of basic procedures used in an audit?
Risk assessment procedures.
Substantive procedures.
Test of controls.
Tests of directional effectiveness.
Tests of directional effectiveness.
Before applying substantive procedures to the details of asset accounts at an interim date, an auditor should assess
Control risk at below the maximum level.
Inherent risk at the maximum level.
The difficulty in controlling the incremental audit risk.
Materiality for the accounts tested as insignificant.
The difficulty in controlling the incremental audit risk.
This answer is correct because professional standards require that an auditor assess the difficulty in controlling the incremental audit risk. In addition, the auditor should consider the cost of the substantive tests that are necessary to appropriately examine the remaining period.
An auditor compared the current year gross margin with the prior year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?
Test of transactions.
Analytical procedures.
Test of controls.
Test of details.
Analytical procedures.
This answer is correct because this is an example of an analytical procedure as presented in the professional standards.
While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because
Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested.
The records may be accurate even though they are maintained by persons having incompatible functions.
Substantive tests relate to the entire period under audit, but tests of controls ordinarily are confined to the period during which the auditor is on the client’s premises.
Many computerized procedures leave no audit trail of who performed them, so substantive tests may necessarily be limited to inquiries and observation of office personnel.
The records may be accurate even though they are maintained by persons having incompatible functions.
This answer is correct because while records may be accurate, information about maintenance of records by persons having incompatible functions may not be obtained.
The objective of tests of details of transactions performed as substantive procedures is to
Detect material misstatements in the financial statements.
Evaluate whether management’s policies and procedures operated effectively.
Identify specific financial statement assertions that satisfy the audit objectives.
Verify that significant deficiencies in the accounting system are discovered.
Detect material misstatements in the financial statements.
This answer is correct because the objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the financial statements.
Which of the following is most likely to be considered a “further audit procedure?”
Communication with the predecessor auditor.
Preparation of an engagement letter.
Preparation of a flowchart of the sales function.
Performance of tests of controls.
Performance of tests of controls.
This answer is correct because tests of controls and substantive procedures are further audit procedures.
The auditor notices significant fluctuations in key elements of the company’s financial statements. If management is unable to provide an acceptable explanation, the auditor should
Consider the matter a scope limitation.
Perform additional audit procedures to investigate the matter further.
Intensify the examination with the expectation of detecting management fraud.
Withdraw from the engagement.
Perform additional audit procedures to investigate the matter further.
This answer is correct because the auditor should investigate fluctuations that are not expected. The investigation would ordinarily begin with inquiries of management. If management is unable to provide an acceptable explanation, the auditor should perform additional procedures to investigate the fluctuation further.
Samples to test internal control structure procedures are intended to provide a basis for an auditor to conclude whether:
The control procedures are operating effectively.
The financial statements are materially misstated.
The risk of incorrect acceptance is too high.
Materiality for planning purposes is at a sufficiently low level.
The control procedures are operating effectively.
Tests of controls are intended to enable the auditor to ascertain whether the controls are operating effectively.
Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:
Assess control risk at below the maximum for the assertions embodied in the accounts selected for interim testing.
Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.
Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
Obtain written representations from management that all financial records and related data will be made available.
Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
The auditor’s objective is to issue an opinion on the financial statements at the balance sheet date. The performance of substantive tests prior to the balance sheet date increases the risk that misstatements may occur at the balance sheet date that the auditor will not detect. As a result, the auditor must consider certain factors carefully before electing to perform such tests. The performance of substantive analytical procedures to address the roll-forward activity between the interim date and the year-end date would specifically consider whether the amounts of the year-end balances are reasonably predictable with respect to amount, significance, and composition.
Which of the following procedures would an auditor most likely perform during an audit engagement’s overall review stage in formulating an opinion on an entity’s financial statements?
Obtain assurance from the entity’s attorney that all material litigation has been disclosed in the financial statements.
Verify the clerical accuracy of the entity’s proof of cash and its bank cutoff statement.
Determine whether inadequate provisions for the safeguarding of assets have been corrected.
Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.
Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.
During the overall review stage, the auditor assesses the conclusions reached and the evaluation of the overall financial statement presentation. As part of that evaluation, he/she would consider whether the results of the audit procedures performed affect the risk of material misstatement due to fraud. The overall review would include considering the adequacy of the evidence gathered in response to unusual or unexpected balances and whether such balances reflected a misstatement due to fraud.
