chap 12 tests of controls

Question 1

what are 3 things that effect the depth of understanding an auditor needs of the internal controls in an outsourced system?

Answer 1

1. the complexity of the system 2. the extent to which the control is relied upon to reduce control risk 3. the extent to which key controls over transaction related audit objectives reside at the service center

Question 2

why are service centers engaging CPA firms to obtain an understanding and test internal controls of the service center ? (2)

Answer 2

1. to provide service center customers reasonable assurance about the adequacy of the service centers general and application controls 2. to eliminate the need for redundant audits by customers auditors

Question 3

in most cases, the auditor doesn’t gather enought evidence during the understanding phase to do what?

Answer 3

reduce assessed control risk to a sufficiently low level

Question 4

making inquires of client personnel is appropriate but not a highly ____ source of evidence

Answer 4

reliable

Question 5

T/F auditing standards state that the user auditor should not make reference to the report of the service auditor in the opinion on the user organizations FSs

Answer 5

T

Question 6

the procedures to test effectiveness of controls in support of a reduced assessed control risk

Answer 6

tests of controls

Question 7

if the test of controls indicate that the controls did not operate effectively, what must be reconsidered

Answer 7

the assessed control risk

Question 8

is it better to perform the audit procedures for understanding and test of controls separtely or simultaneously?

Answer 8

simultaneously as you get the same amount of evidence but more efficiently

Question 9

what are tests of controls?

Answer 9

the procedures to test effectiveness of controls in support of a reduced assessed control risk

Question 10

why is it difficult to obtain an undestanding of the clients internal controls for transaction areas that are soutsourced?

Answer 10

because many of the controls reside at the service center

Question 11

the auditor may be able to justify testing only one transaction and not a sample when what 2 criteria are in place?

Answer 11

1. effective general controls 2. automated application control

Question 12

the timing of the auditors test of controls depends on what 2 things?

Answer 12

1. the nature of the controls 2. when the company uses them

Question 13

what are the 3 ways an auditor can get evidence about the operating effectiveness of internal controls to assess control risk when dealing with a service organization providing help to the company they are auditing

Answer 13

1. based on the service auditors type 2 report which includes test of operating effectiveness of controls 2. come from tests of the user organizastion controls over the activities of the service organization 3. be created when user auditor does appropriate tests at the service organization

Question 14

if the user auditor decides to rely on the service auditors report, approprate inquiries should be made about what?

Answer 14

the service auditors reputation

Question 15

when the auditor risk assessment procedures identify significnat risks, the auditor is required to test the operating effectiveness of controls that mitigate these risks in the current year audit, if the auditors plans to what?

Answer 15

realy on those controls to support a control risk assessment of below 100 %

Question 16

when auditors plan to use evidence about the operating effectiveness of internal control obtained in prior audits, auditing standards require tests of the controls effectiveness at least every ____ year

Answer 16

third

Question 17

assessing control risk requires the auditor to consider the ____, ____, and _____ of controls to evaluate whether they will likely be effective in what?

Answer 17

design implementation operation meeting related audit objectives

Question 18

if auditors determine that a key control has been changed since it was last tested, they should do what?

Answer 18

test it in the current year

Question 19

if the results of test of controls support the design and operation of controls as expected, the auditor uses the same assessed control risk as the ?

Answer 19

preliminary assessment

Question 20

for key controls, tests of controls other than _____ are essentially an extension of procedures to obtain an understanding

Answer 20

reperformance

Question 21

what are the 2 primary differences in the tests of controls and the procedures to obtain understanding of controls

Answer 21

1. procedures to obtain an undestanding are applied to all controls identified during that phase. tests of controls only applied when the assessed control risk has not been satisfied by the procedures for understanding 2. procedures for understanding are only performed on one a a few transactions or at a single point in time. test of controls are peformed on larger samples of transactions and often observation sare made at more than one point in time

Question 22

what are the 2 types of reports service auditors can issue?

Answer 22

1. report on managements description of a service organizations system and the suitability of the design of controls 2. report on managments description of a service organizations system and the suitability of the design and operating effectiveness of controls

Question 23

the auditor must obtain additional evidence about the ___ ___ of controls throughout all, or at least most of the period under audit

Answer 23

operating effectiveness

Question 24

for control that are applied throught the accounting period, it is usually practical to test them what?

Answer 24

at an interim date and then determine if changes in controls occured in period not tested and decide implications of any change

Question 25

what are the 4 procedures an auditor is likely to use to support the operating effectiveness of internal controls? (managemnt testing of internal controls liekly have same types of procedures)

Answer 25

1. make inquiries of the appropriate client personnell 2. examine documents, records, and reports 3. observe control related activities 4. reperform client procedures

Question 26

when there are a number of controls tested in prior audits that have not been changed, auditing standards require what?

Answer 26

auditors test some of those controls each year to ensure there is a rotation of conrol testing throughout the 3 year period

Question 27

what are the 3 things common to test of controls and procedured to obtain an understanding of controls?

Answer 27

1. inquiry 2. inspecting 3. observation

Question 28

the extent of testing depends on what two things regarding the controls?

Answer 28

1. the frequency of the operation of the control 2. whether the control is manual or automated

Question 29

the extent to which test of controls are applied depends on what?

Answer 29

the preliminary assessed control risk