Chapter 13: Overall Audit Strategy and Audit Program

Question 1

Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests?

1. risk assessment procedures
2. tests of controls
3. substantive tests of transactions
4. substantive analytical procedures
5. tests of details of balances

A) 1, 2, and 3

B) 3, 4, and 5

C) 2, 3, and 5

D) 2, 3, and 4

Answer 1

B) 3, 4, and 5

Question 2

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor’s

A) audit strategy.

B) tests of controls.

C) risk assessment procedures.

D) tests of transactions.

Answer 2

C) risk assessment procedures.

Question 3

Which of the following would notbe considered further audit procedures?

A) tests of controls

B) analytical procedures

C) tests of details of balances

D) risk assessment procedures

Answer 3

D) risk assessment procedures

Question 4

Which of the following procedures would most likely be performed in response to the auditor’s assessment of the risk of monetary misstatements in the financial statements?

A) ratio analysis

B) tests of controls

C) tests of details of balances

D) risk assessment procedures

Answer 4

C) tests of details of balances

Question 5

Which of the following further audit procedures are used to determine whether all six transaction-related audit objectives have been achieved for each class of transactions?

A) tests of controls

B) risk assessment procedures

C) substantive tests of transactions

D) preliminary analytical procedures

Answer 5

C) substantive tests of transactions

Question 6

You are auditing Rodgers and Company. After performing substantive analytical procedures you conclude that, for the accounts tested, the client’s balance appears reasonable. This may indicate that

A) details test of balances can be eliminated for those accounts.

B) certain tests of details of balances may be eliminated for those accounts.

C) control tests may be eliminated for those accounts.

D) control tests may be reduced for those accounts.

Answer 6

B) certain tests of details of balances may be eliminated for those accounts.

Question 7

The purpose of tests of controls is to provide reasonable assurance that the

A) accounting treatment of transactions and balances is valid and proper.

B) internal control procedures are functioning as intended.

C) entity has complied with GAAP disclosure requirements.

D) entity has complied with requirements of quality control.

Answer 7

B) internal control procedures are functioning as intended.

Question 8

In the context of an audit of financial statements, substantive tests are audit procedures that

A) may be eliminated under certain conditions.

B) are designed to discover significant subsequent events.

C) are designed to test for dollar misstatements.

D) will increase proportionately with the auditor’s reliance on internal control.

Answer 8

C) are designed to test for dollar misstatements.

Question 9

Which of the following is true?

A) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts.

B) Tests of details of balances focus on the transactions during the period for both balance sheet and income statement accounts.

C) Tests of details of balances focus on the auditor’s understanding of internal controls.

D) Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the auditor.

Answer 9

A) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts.

Question 10

A system walkthrough is primarily used to help the auditor

A) test the ending account balances.

B) test the details of transactions.

C) determine whether internal controls have been properly implemented.

D) determine whether the audit engagement should be accepted.

Answer 10

C) determine whether internal controls have been properly implemented.

Question 11

Risk assessment procedures are performed by auditors during an audit in order to

A) determine the risk of material misstatement in the financial statements.

B) determine the amount of testing of internal control.

C) determine the extent of testing of details of balances.

D) determine the extent of testing of transactions.

Answer 11

A) determine the risk of material misstatement in the financial statements.

Question 12

Tests of controls are directed toward the control’s

A) efficiency.

B) effectiveness.

C) cost and effectiveness.

D) cost benefit ratio.

Answer 12

B) effectiveness.

Question 13

A procedure designed to test for monetary misstatements directly affecting the correctness of financial statement balances is a

A) test of controls.

B) substantive test.

C) test of attributes.

D) monetary unit sampling test.

Answer 13

B) substantive test.

Question 14

Analytical procedures

A) focus on the ending balances for income statement accounts.

B) are only performed during the planning stage of the audit.

C) are required to be performed when auditing an account balance.

D) provide substantive evidence.

Answer 14

D) provide substantive evidence.

Question 15

The primary emphasis in most tests of details of balances is on the

A) balance sheet accounts.

B) revenue accounts.

C) cash flow statement accounts.

D) expense accounts.

Answer 15

A) balance sheet accounts.

Question 16

Which of the following statements is nottrue?

A) Analytical procedures emphasize the overall reasonableness of transactions and balances.

B) Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk and thereby reducing analytical review procedures.

C) Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger.

D) Tests of details of balances emphasize the ending balances in the general ledger.

Answer 16

B) Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk and thereby reducing analytical review procedures.

Question 17

Many auditors perform extensive analytical procedures because

A) they are required by GAAS.

B) they pinpoint errors in accounts.

C) they indicate areas of potential risk and misstatement.

D) they are required for tests of controls.

Answer 17

C) they indicate areas of potential risk and misstatement.

Question 18

The auditor has determined that a key control in the audit of the sales and collection cycle is that recorded sales are supported by authorized shipping documents and approved customer orders. What typical test of controls should be used in this situation?

A) Examine a sample of duplicate sales invoices to determine that each on is supported by an authorized shipping document and approved customer order.

B) Observe whether shipping documents are forwarded daily to billing and observe when they are billed.

C) Examine a sample of sales invoices and agree prices to the authorized computer price list.

D) Use audit software to trace postings from the batch of sales transactions to the subsidiary and general ledgers.

Answer 18

A) Examine a sample of duplicate sales invoices to determine that each on is supported by an authorized shipping document and approved customer order.

Question 19

Which of the following is ordinarily designed to detect material dollar errors on the financial statements?

A) tests of controls

B) analytical review procedures

C) computer controls

D) tests of details of balances

Answer 19

D) tests of details of balances

Question 20

List each of the five types of audit tests.

Answer 20

• risk assessment procedures
• tests of controls
• substantive tests of transactions
• substantive analytical procedures
• tests of details of balances

Question 21

For automated controls, the auditor’s procedures to determine whether the automated control has been implemented cannot also serve as the test of that control.

TRUE OR FALSE

Answer 21

FALSE

Question 22

Procedures to obtain an understanding of internal control generally provide sufficient appropriate evidence that a control is operating effectively.

TRUE OR FALSE

Answer 22

FALSE

Question 23

Substantive tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances.

TRUE OR FALSE

Answer 23

TRUE

Question 24

Risk assessment procedures are performed to assess the risk of material misstatement in the financial statements.

TRUE OR FALSE

Answer 24

TRUE

Question 25

Tests of controls should be performed after substantive tests of transactions.

TRUE OR FALSE

Answer 25

FALSE

Question 26

Tests of details of balances emphasize the overall reasonableness of transactions and the general ledger balances.

TRUE OR FALSE

Answer 26

FALSE

Question 27

Auditors must perform tests of controls separately from substantive tests of transactions.

TRUE OR FALSE

Answer 27

FALSE

Question 28

One factor that determines the amount of additional evidence required for tests of controls is the planned reduction in control risk.

TRUE OR FALSE

Answer 28

TRUE

Question 29

Tests of controls are performed to support a reduced assessment of detection risk.

TRUE OR FALSE

Answer 29

FALSE

Question 30

In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly?

A) substantive analytical procedures

B) risk assessment procedures

C) tests of controls

D) tests of details of balances

Answer 30

D) tests of details of balances

Question 31

An exception or deficiency found in a test of controls

A) indicates a financial statement misstatement.

B) indicates the likelihood of a misstatement.

C) indicates that the financial statements are fairly stated.

D) indicates that an adverse opinion is warranted on the audit of internal control.

Answer 31

B) indicates the likelihood of a misstatement.

Question 32

If no material differences are found using analytical procedures, and the auditor concludes that misstatements are notlikely to have occurred,

A) other substantive tests may be reduced.

B) it will be necessary to increase the tests of balances.

C) it will not be necessary to perform tests of balances.

D) it will be necessary to increase the tests of transactions.

Answer 32

A) other substantive tests may be reduced.

Question 33

Which of the following audit tests is usually the least costly to perform?

A) substantive analytical procedures

B) tests of controls

C) tests of balances

D) substantive tests of transactions

Answer 33

A) substantive analytical procedures

Question 34

An increased extent of tests of controls is most likely to occur when

A) it is a first-year audit.

B) the auditor is doing a “fraud audit.”

C) controls are effective and the preliminary control risk assessment is low.

D) controls are ineffective and the preliminary control risk assessment is high.

Answer 34

C) controls are effective and the preliminary control risk assessment is low.

Question 35

If tests of controls support the control risk assessment, then ________ in the audit risk model is increased.

A) planned detection risk

B) planned inherent risk

C) planned fraud risk

D) planned assurance risk

Answer 35

A) planned detection risk

Question 36

The auditor would design which of the following audit tests to detect possible monetary errors in the financial statements?

A) control tests

B) substantive analytical procedures

C) risk assessment procedures

D) tests of operating effectiveness of controls over revenue and cash

Answer 36

B) substantive analytical procedures

Question 37

The reliance the auditor places on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily

A) parallel.

B) inverse.

C) direct.

D) equal.

Answer 37

B) inverse.

Question 38

A deficiency uncovered in the audit of internal control is explained by which of the following in relation to a financial statement misstatement?

A) the amount of the misstatement

B) the likelihood of the misstatement

C) the amount, likelihood, and classification of the misstatement

D) the amount and the classification of the misstatement

Answer 38

B) the likelihood of the misstatement

Question 39

Several factors influence the auditor’s choice of the types of tests to select, including

A) the availability of the types of evidence.

B) the relative costs of each type of test.

C) the effectiveness of the internal controls.

D) all of the above.

Answer 39

D) all of the above.

Question 40

Tests of controls are generally more costly to perform than analytical procedures.

TRUE OR FALSE

Answer 40

TRUE

Question 41

Only tests of details of balances involve physical examination and confirmation.

TRUE OR FALSE

Answer 41

TRUE

Question 42

Analytical procedures are the least costly type of audit test.

TRUE OR FALSE

Answer 42

TRUE

Question 43

In a computerized environment, the auditor can often perform substantive tests of transactions quickly for a large sample of transactions.

TRUE OR FALSE

Answer 43

TRUE

Question 44

The cost of each type of evidence does notvary in different situations.

TRUE OR FALSE

Answer 44

FALSE

Question 45

Because of the high cost of tests of details of balances, auditors do notperform this type of testing unless fraud is suspected.

TRUE OR FALSE

Answer 45

FALSE

Question 46

The auditor’s understanding of internal control performed as part of risk assessment procedures provides the basis for the auditor’s initial assessment of control risk.

TRUE OR FALSE

Answer 46

TRUE

Question 47

Analytical procedures are the most expensive type of audit test to perform because of the expertise and training required to properly use them.

TRUE OR FALSE

Answer 47

FALSE

Question 48

The results of tests of controls and substantive tests of transactions affect the design of tests of details of balances.

TRUE OR FALSE

Answer 48

TRUE

Question 49

If internal controls are tested and are considered effective, the auditor generally will increase both substantive tests of transactions and tests of details of balances.

TRUE OR FALSE

Answer 49

FALSE

Question 50

Tests of controls provide evidence about the likelihood for misstatements in a client’s financial statements.

TRUE OR FALSE

Answer 50

TRUE

Question 51

An exception in a test of control provides only an indication of the likelihood of monetary misstatements in the financial statements because tests of controls donotreveal whether monetary misstatements have actually occurred.

TRUE OR FALSE

Answer 51

TRUE

Question 52

Which of the following is generally notincluded in the “evidence mix”?

A) tests of controls

B) substantive tests of transactions

C) risk assessment procedures

D) tests of details of balances

Answer 52

C) risk assessment procedures

Question 53

The ________ is the combination of the types of tests to obtain sufficient appropriate evidence for a cycle. There are likely to be variations in the mix from cycle to cycle depending on the circumstances of the audit.

A) testing mix

B) evidence mix

C) audit process mix

D) procedures mix

Answer 53

B) evidence mix

Question 54

Which of the following would most likely notbe included in the evidence mix for an integrated audit of a public company’s financial statements and internal control over financial reporting?

A) sophisticated internal controls

B) extensive substantive analytical procedures

C) extensive tests of details of balances

D) low inherent risk

Answer 54

C) extensive tests of details of balances

Question 55

If the auditor finds extensive control test deviations and significant misstatements while performing substantive tests of transactions and substantive analytical procedures,

A) the cost of the audit should decrease.

B) the auditor will conclude that internal controls are effective.

C) extensive tests of details of balances will need to be performed.

D) all of the above

Answer 55

C) extensive tests of details of balances will need to be performed.

Question 56

The evidence mix includes risk assessment procedures.

TRUE OR FALSE

Answer 56

FALSE

Question 57

The choice of which types of tests to use and how extensively they need to be performed must be the same for all audits.

TRUE OR FALSE

Answer 57

FALSE

Question 58

The document that details the specific audit procedures for each type of test is the

A) audit strategy.

B) audit program.

C) audit procedure.

D) audit risk model.

Answer 58

B) audit program.

Question 59

Auditors follow a four step approach to reduce assessed control risk. Which of the following is notone of the four?

A) Apply transaction-related audit objectives to a class of transactions.

B) Identify accounts that have high inherent risk.

C) Identify key controls that reduce control risk.

D) For potential misstatements, design appropriate substantive tests of transactions.

Answer 59

B) Identify accounts that have high inherent risk.

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

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

Question 60

When designing the audit program and the particular audit tests, the auditor should keep in mind that

A) the audit program is broken down into two parts-the risk assessment procedures and the tests of details of balances.

B) the tests of controls will not vary depending on assessed control risk.

C) analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning.

D) auditing standards require that the tests contained in the audit program must be approved by the PCAOB.

Answer 60

C) analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning.

Question 61

The auditor obtained an aged list of receivables and traced the accounts to the master file, footed the schedule, and traced the amounts to the general ledger. Which balance-related audit objective was met?

A) existence

B) cutoff

C) detail tie-in

D) all of the above

Answer 61

C) detail tie-in

Question 62

One of the most challenging parts of auditing is properly applying the factors that affect tests of details of balances.

TRUE OR FALSE

Answer 62

TRUE

Question 63

Auditing standards require a written audit program.

TRUE OR FALSE

Answer 63

TRUE

Question 64

When designing an audit program for tests of details of balances, the auditor should make assumptions about inherent risk and control risk, and predictions concerning the outcome of tests of controls, substantive tests of transactions, and analytical procedures.

TRUE OR FALSE

Answer 64

TRUE

Question 65

Once set during the planning phase, the audit program cannot be revised.

TRUE OR FALSE

Answer 65

FALSE

Question 66

Inherent risk can be extended to individual balance-related audit objectives.

TRUE OR FALSE

Answer 66

TRUE

Question 67

When controls are effective and control risk is assessed as low, auditors put heavy emphasis on tests of balances.

TRUE OR FALSE

Answer 67

FALSE

Question 68

There is a direct relationship between the ________ transaction-related audit objective and the ________ balance-related audit objective.

A) occurrence; existence

B) timing; cutoff

C) posting and summarization; detail tie-in

D) all of the above

Answer 68

D) all of the above

Question 69

If all transaction-related audit objectives are met, the auditor does notneed to perform substantive test of balances to meet the realizable value audit objective.

TRUE OR FALSE

Answer 69

FALSE

Question 70

The auditor performs tests of controls and substantive procedures to obtain assurance that all audit objectives are achieved for information and amounts included in those disclosures.

TRUE OR FALSE

Answer 70

TRUE

Question 71

What type of test is used to obtain the most types of evidence?

A) substantive tests of transactions

B) tests of controls

C) risk assessment tests

D) tests of details of balances

Answer 71

D) tests of details of balances

Question 72

Which phase(s) of the audit uses inquiries of clients as a type of evidence?

A) plan and design

B) tests of controls and substantive tests of transactions

C) completion of the audit and issuance of the audit report

D) all of the above

Answer 72

D) all of the above

Question 73

Which audit tests involve physical examination and confirmation?

A) tests of controls

B) tests of transactions

C) tests of details of balances

D) analytical procedures

Answer 73

C) tests of details of balances

Question 74

Which of the following types of evidence is notavailable when using substantive tests of transactions?

A) inspection

B) confirmation

C) inquiries of the client

D) reperformance

Answer 74

B) confirmation

Question 75

Presentation and disclosure objectives are primarily addressed in the tests of details of balances phase of the audit.

TRUE OR FALSE

Answer 75

FALSE

Question 76

Presentation and disclosure related audit objectives would be performed in which phase of the audit process?

A) plan and design audit approach

B) perform audit tests for controls and transactions

C) perform analytical procedures and tests of balances

D) complete the audit and issue the audit report

Answer 76

D) complete the audit and issue the audit report

Question 77

Transaction-related audit objectives would most likely be performed in which phase of the audit process?

A) plan and design audit approach

B) perform tests of controls and substantive tests of transactions

C) perform substantive analytical procedures and tests of details of balances

D) complete the audit and issue the audit report

Answer 77

B) perform tests of controls and substantive tests of transactions

Question 78

Which of the following is an accurate statement regarding the four phases of the audit process?

A) After the planning stage, the auditor should have a well-defined audit strategy and plan and a specific audit program for the entire audit.

B) The objective of phase III is to perform tests of controls.

C) During phase II, the auditor must evaluate the going-concern assumption.

D) All of the above are correct statements.

Answer 78

A) After the planning stage, the auditor should have a well-defined audit strategy and plan and a specific audit program for the entire audit.

Question 79

Which of the following tests commonly occur together?

A) substantive tests of transactions and tests of controls

B) substantive tests of transactions and obtaining an understanding of internal controls

C) analytical procedures and tests of controls

D) tests of controls and tests of details of balances

Answer 79

A) substantive tests of transactions and tests of controls

Question 80

Tests of controls and substantive tests of transactions are an important determinant of the extent of the auditor’s use of tests of details of balances. Which of the following is true?

A) They are likely to be performed prior to the client’s end of the fiscal year.

B) They are likely to eliminate the need for tests of details of balances.

C) They are likely to have no impact on the planned tests of details of balances.

D) They are likely to be used only in the audit of internal control.

Answer 80

A) They are likely to be performed prior to the client’s end of the fiscal year.

Question 81

When the auditor has completed the tests of details of balances and enters phase IV of the audit process, she must still perform audit procedures for which of the following?

A) contingent liabilities and employee compensation

B) contingent liabilities and subsequent events

C) subsequent events and contractual commitments

D) subsequent events and unrecorded liabilities

Answer 81

B) contingent liabilities and subsequent events

Question 82

Which of the following audit tests would be regarded as a test of controls?

A) comparison of the inventory pricing to vendors’ invoices

B) tests of the signatures on canceled checks to board of directors’ authorizations

C) tests of the additions to property, plant, and equipment by physical inspections

D) review of the specific items making up the balance in a given general ledger account

Answer 82

B) tests of the signatures on canceled checks to board of directors’ authorizations

Question 83

Which of the following audit tests form the basis for an auditor’s report on internal control over financial reporting?

A) analytical procedures

B) tests of transactions

C) tests of controls

D) tests of details of balances

Answer 83

C) tests of controls

Question 84

Management implements internal controls to ensure that all required footnote disclosures are accurate. Auditors tests those controls to provide evidence supporting the ________ presentation.

A) completeness and valuation

B) completeness and accuracy

C) rights and obligations and existence

D) occurrence and accuracy

Answer 84

B) completeness and accuracy

Question 85

At what point in the audit process are tests of details most appropriately designed?

A) plan and design audit approach

B) perform audit tests of controls and substantive tests of transactions

C) perform substantive analytical procedures and tests of details of balances

D) complete the audit and issue the audit report

Answer 85

C) perform substantive analytical procedures and tests of details of balances

Question 86

Which of the following is notcompleted during phase IV of the audit?

A) Obtain a client representation letter.

B) Read information in the annual report to make sure that it is consistent with the financial statements.

C) Perform substantive tests of transactions.

D) Perform final analytical procedures.

Answer 86

C) Perform substantive tests of transactions.

Question 87

For clients with highly sophisticated computerized accounting systems, auditors perform tests throughout the year to identify significant or unusual transactions. This approach is called ________ and is frequently used in integrated audits of financial statements and internal control for public companies.

A) continuous audit program

B) continuous auditing

C) continuous analytical testing

D) continuous audit mix

Answer 87

B) continuous auditing

Question 88

Analytical procedures performed during phase III of the audit

A) must be performed before the balance sheet date.

B) can be used as a means of planning and directing other audit tests to specific areas.

C) should be done after tests of details of balances.

D) are expensive and are therefore not frequently used by the auditor.

Answer 88

B) can be used as a means of planning and directing other audit tests to specific areas.

Question 89

In phase IV of the audit, complete the audit and issue an audit report, there are five activities required. List below the activities.

Answer 89

1. perform additional tests for presentation and disclosure
2. accumulate final evidence
3. evaluate results
4. issue audit report
5. communicate with audit committee and management

Question 90

In accumulating final evidence upon which to base an audit opinion, the auditor should perform four activities. List the activities below.

Answer 90

1. perform final analytical procedures
2. evaluate the going concern assumption
3. obtain a client representation letter
4. read information in the annual report to ensure that it is consistent with the financial statements

Question 91

The auditor must communicate significant deficiencies in internal control only after the entire audit is complete to ensure the auditor has a sufficient understanding of the circumstances surrounding the deficiency.

TRUE OR FALSE

Answer 91

FALSE

Question 92

Subsequent events represent events that occasionally occur after the balance sheet date, but before the issuance of the financial statements and the auditor’s report, that have an effect on the financial statements.

TRUE OR FALSE

Answer 92

TRUE

Question 93

Substantive tests of balances performed before year-end provide significant assurance and are normally only done when internal controls are ineffective.

TRUE OR FALSE

Answer 93

FALSE