AUD - 4 Flashcards
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:
A. Perform tests of controls to support a lower level of assessed control risk. B. Adjust the materiality level and consider the effect on inherent risk. C. Apply analytical procedures and consider the effect on control risk. D. Increase the sample size to reduce sampling risk and detection risk.
Choice “A” is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone. In such cases, tests of controls should be performed.
Choices “D”, “B”, and “C” are incorrect. Certain factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone. In such cases, tests of controls should be performed to address the increased potential for unauthorized access, the risks of insufficient paper-based audit evidence, and the fact that the appropriateness and sufficiency of evidence may be dependent to some extent on computerized controls. Simply expanding the sample size, adjusting materiality levels, or applying analytical procedures will not address these concerns.
Which of the following procedures is considered a test of controls?
A. An auditor reviews the audit workpapers to ensure proper sign-off. B. An auditor reviews the entity's check register for unrecorded liabilities. C. An auditor evaluates whether a general journal entry was recorded at the proper amount. D. An auditor interviews and observes appropriate personnel to determine segregation of duties.
Choice “D” is correct. Interviewing and observing appropriate personnel to determine segregation of duties is a test of controls. Segregation of duties is a subcomponent of the control activities component of internal control.
Choice “A” is incorrect. An auditor’s review of the audit workpapers to ensure proper sign-off is not a test of the client’s controls, but rather a procedure that provides quality control that the audit was adequately performed.
Choice “B” is incorrect. An auditor’s review of the entity’s check register for unrecorded liabilities is a substantive test.
Choice “C” is incorrect. An auditor’s evaluation as to whether a journal entry was recorded at the proper amount is a substantive test.
In obtaining an understanding of an entity’s system of internal control, an auditor is required to obtain knowledge about the:
Operating effectiveness of controls
Design of controls
A. No Yes B. Yes Yes C. No No D. Yes No
Choice “A” is correct. No - Yes. In obtaining an understanding of an entity’s system of internal control, an auditor is required to obtain knowledge about the design of controls and whether they have been implemented. The auditor is not required to obtain knowledge about the “operating effectiveness of controls” as part of obtaining an understanding of the system of internal control.
An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?
A. The planned level of control risk.
B. Management’s assertions that controls exist and are operating efficiently.
C. The effectiveness of controls.
D. The planned level of assurance at the relevant assertion level.
Choice “D” is correct. An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports the planned level of assurance at the relevant assertion level.
Choice “A” is incorrect. Test of controls, not test of details, would support the planned level of control risk.
Choice “B” is incorrect. Test of controls, not test of details, would help evaluate management’s assertions that controls exist and are operating effectively.
Choice “C” is incorrect. The objective of tests of controls is to evaluate whether a control operated effectively.
In obtaining an understanding of the entity and its environment, including its system of internal control, an auditor is required to obtain knowledge about the:
A. Design of relevant controls pertaining to financial reporting in each of the five internal control components.
B. Effectiveness of the internal controls that have been placed in operation.
C. Consistency with which the internal controls are currently being applied.
D. Controls related to each principal transaction class and account balance.
Choice “A” is correct. In every audit, the auditor should obtain a sufficient understanding of the design of relevant controls pertaining to financial reporting in each of the five internal control components.
Choice “B” is incorrect. The auditor is not required, as a part of obtaining an understanding of the entity and its environment (including its system of internal control), to determine whether internal controls are operating effectively.
Choice “C” is incorrect. The auditor is not required, as a part of obtaining an understanding of the entity and its environment (including its system of internal control), to determine the consistency with which a control is applied.
Choice “D” is incorrect. Audit planning does not require an understanding of the controls related to each account balance, transaction class, and disclosure component in the financial statements. For certain items, a primarily substantive approach may be used instead.
In the integrated audit of an issuer, which of the following best states the use of substantive audit procedures in the audit of internal control over financial reporting and in the financial statement audit?
A. Substantive auditing procedures are required in the audit of internal control but not in the financial statement audit.
B. Both audits require the performance of substantive auditing procedures.
C. Substantive auditing procedures are required in the financial statement audit, but not in the audit of internal control.
D. Neither audit requires the performance of substantive auditing procedures.
Choice “C” is correct. Substantive auditing procedures provide the audit evidence that an auditor needs in order to opine on the financial statements. Substantive procedures include substantive analytical procedures and tests of details. These types of procedures are performed in a financial statement audit but not in the audit of internal control.
Choice “A” is incorrect. Substantive auditing procedures are only required in the financial statement audit.
Choice “B” is incorrect. Substantive auditing procedures are not required in the audit of internal control over financial reporting because the procedures pertain to the financial statement assertions.
Choice “D” is incorrect. A financial statement audit requires that the auditor perform substantive auditing procedures.
Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?
A. Attorneys’ responses to the auditor’s inquiries.
B. Confirmations of receivables verifying account balances.
C. Letters of representation corroborating inventory pricing.
D. Client records documenting the use of EDP programs.
Choice “D” is correct. The examination of client records documenting the use of EDP programs is a test of controls.
Choice “A” is incorrect. Attorneys’ responses to the auditor’s inquiries are part of a substantive test, not a test of controls.
Choice “B” is incorrect. Confirmations of receivables verifying account balances is a substantive test, not a test of controls.
Choice “C” is incorrect. Obtaining letters of representation corroborating inventory pricing is a substantive test, not a test of controls.
If misstatements are below materiality and tolerable misstatement
Which of the following conclusions is Jose most likely to form on the ending accounts receivable balance?
A. Based on the accounts receivable testing, the accounts receivable balance is materially misstated because the required adjustments identified exceed the audit materiality. B. Based on the accounts receivable testing, the accounts receivable balance is materially misstated because the required adjustments identified exceed the tolerable misstatement. C. Based on the accounts receivable testing, the accounts receivable balance is not materially misstated because the required adjustments identified are less than the audit materiality. D. Based on the accounts receivable testing, the accounts receivable balance is not materially misstated because the required adjustments identified are less than the tolerable misstatement.
Choice “D” is correct. Based on the accounts receivable testing, the accounts receivable balance is not materially misstated because the required adjustments identified ($3,770) are less than the tolerable misstatement ($11,000).
Choices “A” and “B” are incorrect. The accounts receivable balance is not materially misstated.
Choice “C” is incorrect. For testing at the account level for issuers, the auditor should compare tolerable misstatement, not overall materiality, to the adjustments amount to determine whether an account balance is materially misstated.
