Chapter 13

Question 1

FIVE TYPES OF AUDIT TESTS- In the correct order

Answer 1

1. Risk Assessment Procedures
2. Tests of Controls
3. Substantive Tests of Transactions
4. Substantive Analytical Procedures
5. Tests of Details of Balances

Question 2

Risk Assessment Procedures –

Answer 2

Auditors use the results of risk assessment procedures to determine the type and amount of further audit procedures necessary to form an opinion on the fairness of the financial statements.

Collectively, procedures performed to obtain an understanding of the entry and its environment , including internal controls, represents the auditor’s risk assessment procedures.

Question 3

Tests of Controls –

Answer 3

To obtain sufficient appropriate evidence to support a reduced assessment of control risk, the auditor:

a. Make inquiries of appropriate client personnel
b. Examine documents, records, and reports
c. Observe control-related activities
d. Reperform client procedures

The amount of evidence needed for tests of controls depends on two things:

a. The extent of evidence obtained in gaining the understanding of internal control
b. The planned reduction in control risk

Question 4

Substantive Tests of Transactions –

Answer 4

Used to determine whether all seven transaction-related audit objectives have been satisfied for each class of transactions.

Question 5

Substantive Analytical Procedures -

Answer 5

Although not required, substantive analytical procedures may be used to audit an account balance. The two most important purposes of substantive analytical procedures are:

a. Indicate possible misstatements in the financial statements
b. Provide substantive evidence

Question 6

Tests of Details of Balances –

Answer 6

Used to determine whether all nine balance-related audit objectives have been satisfied for each class of transactions. The primary emphasis of tests of balances is on the balance sheet.

Question 7

Availability of Types of Evidence for Further Audit Procedures –

Answer 7

Each of the four types of further audit procedures involves only certain types of evidence.

Question 8

Relative Costs

Answer 8

The auditor must decide which type of test to select for obtaining sufficient appropriate evidence and the cost of the evidence is an important consideration.

Question 9

Types of tests in order of increasing cost: (list 5)

Answer 9

• Substantive analytical procedures
• Risk assessment procedures
• Tests of controls
• Substantive tests of transactions
• Tests of details of balances.

Question 10

Relationship Between Tests of Controls and Substantive Tests –

Answer 10

When test of controls show deviations that lead the auditor to believe that there may be material misstatements, the auditors then perform substantive tests to determine whether a material misstatement actually occurred.

Question 11

Relationship Between Substantive Analytical Procedures and Other Substantive Tests -

Answer 11

Analytical procedures only indicate the likelihood of misstatement. Unusual fluctuations indicate an increase in the likelihood.

Question 12

Trade-Off Between Tests of Controls and Substantive Tests –

Answer 12

During planning, auditors decide whether to assess control risk below the maximum. If they do, they must test the controls.

Question 13

Tests of Controls and Substantive Tests of Transactions –

Answer 13

When designing these tests, auditors emphasize satisfying the six transaction-related audit objectives.

Question 14

Auditors follow a four-step approach to reduce assessed control risk:

Answer 14

1. Apply the transaction-related audit objectives to the class of transactions being tested, such as sales.
2. Identify key controls that should reduce control risk for each transaction-related audit objective.
3. Develop appropriate tests of controls for internal controls that are used to reduce the preliminary assessment of control risk below the maximum.
4. For potential types of misstatements related to each transaction-related audit objective, design appropriate substantive tests of transactions, considering deficiencies in internal control and expected results of the tests of controls in step 3.

Question 15

Substantive Analytical Procedures –

Answer 15

Because substantive analytical procedures are relatively inexpensive, many auditors perform them on all audits.

Question 16

Tests of Details of Balances

Answer 16

hen designing these test, auditors emphasize satisfying the eight balance-related audit objectives.

Question 17

The methodology for designing tests of details of balances is: (6)

Answer 17

1. Identify Significant Risks and Assess Risk of Material Misstatement
2. Set Performance Materiality
3. Assess Control Risk for the Sales and Collection Cycle
4. Design and Perform Tests of Controls and Substantive Tests of Transactions
5. Design and Perform Substantive Analytical Procedures
6. Design Tests of Details of Accounts to satisfy balance-related audit objectives.
   a. Audit procedure
   b. Sample size
   c. Items to select
   d. Timing