Chapter 3 Deck 4

Question 1

Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?

Answer 1

Client records documenting the use of EDP programs would be a relevant item for an auditor to examine while determining if internal control is operating as designed. (Think of whether or not it uses dollar amounts and is a substantive test or if it has to do w/ controls)

Question 2

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been?

Answer 2

When evaluating a client’s internal controls, the auditor must first obtain an understanding of the design of the controls and then determine if the controls have been implemented.

Question 3

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

Answer 3

The best compensating control for the lack of segregation of duties in smaller organizations is to have more management oversight of incompatible functions.

Question 4

If an auditor is obtaining an understanding of an issuer’s information and communication component of internal control, which of the following factors should the auditor assess?

Answer 4

The classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements are typically assessed when the auditor is obtaining an understanding of the information and communication component of internal control.

Question 5

Which of the following statements is correct concerning an auditor’s assessment of control risk?

Answer 5

Some risk assessment procedures performed to obtain an understanding of internal control may provide evidence about operating effectiveness, even if they were not intended for that purpose. This is possible because the procedures performed to achieve one objective may also provide evidence regarding the other.

Question 6

The lower the assessed level of control risk (that is, the greater the reliance placed on the control), the more what?

Answer 6

assurance the auditor must gather that the controls are operating effectively.

Question 7

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

Answer 7

Since control risk is assessed at a low level, tests of controls would be required to evaluate the effectiveness of the internal controls to support that assessed level. However, the need for some substantive tests of transactions is never eliminated.

Question 8

After obtaining an understanding of the entity and its environment, including its internal control, an auditor decided to perform tests of controls. This is likely because?

Answer 8

After obtaining an understanding the entity and its environment, including its internal control, the auditor may make a risk assessment that assumes controls are operating effectively. In such cases, the auditor performs tests of controls to obtain evidence supporting this assessment.

Question 9

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including?

Answer 9

Tests of controls include such procedures as inspecting documentation, inquiry, observation, and reperformance. Note that inquiry alone is not sufficient as the auditor should use a combination of procedures.

Question 10

The objective of tests of details used as tests of controls is to?

Answer 10

Evaluate whether an internal control operated effectively.

Question 11

Inquiry, inspection, observation (and reperformance) are all tests that may be used to evaluate what?

Answer 11

the operating effectiveness of an internal control activity

Question 12

What things will support an auditor’s conclusion for a lower level of assessed control risk?

Answer 12

a. Observation by the auditor provides more assurance than audit evidence obtained by inquiry alone.
b .Prior audits may be considered by the auditor in assessing control risk in the current audit.
c. An audit of financial statements is a cumulative process.

Question 13

After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that?

Answer 13

After performing risk assessment procedures, an auditor might decide not to perform tests of controls because it would be inefficient. In other words, the time required to perform tests of controls would be greater than the reduction in time spent on substantive testing.

Question 14

As part of understanding internal control, an auditor is not required to?

Answer 14

As part of understanding internal control, an auditor is not required to obtain knowledge about the operating effectiveness of controls. Operating effectiveness is evaluated later, and only for those controls on which the auditor plans to rely.

Question 15

What documentation is required for an audit in accordance with generally accepted auditing standards?

Answer 15

• The auditor is required to prepare a written audit plan.
• Audit documentation should be sufficient to show that the accounting records agree or reconcile with the financial statements.
• Establishing an understanding with the client is required by GAAS, and an engagement letter is a presumptively mandatory requirement.

Question 16

An audit client sells 15 to 20 units of a product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

Answer 16

Because a large portion of the annual sales occur in the last month of the fiscal year and the number of transactions for the entire year is relatively small, the most effective audit approach would be for the auditor to inspect transactions occurring in the last month of the year and review the sales contracts to determine that revenue was posted in the proper period.

Question 17

Which of the following should an auditor do when control risk is assessed at the maximum level?

Answer 17

When an auditor assesses control risk at the maximum level, the assessment should be documented and the auditor should make decisions to potentially perform more substantive procedures.

Question 18

A senior auditor conducted a dual-purpose test on a client’s invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?

Answer 18

A dual-purpose test is a test of controls that is performed concurrently with a test of details on the same transaction. The purpose of a test of controls is to evaluate the operating effectiveness of a control, whereas the purpose of a test of details is to support relevant assertions or to detect material misstatements. A dual-purpose test should be designed to accomplish both objectives.

Question 19

What are control activities?

Answer 19

Control activities are the policies and procedures that help ensure that management directives are carried out. These policies and procedures may relate to any of the three objectives (financial reporting, operations, and compliance)