QUIZ 4

Question 1

Statement 1: the assessment of inherent risk is based on the understanding of the entity and its environment.
Statement 2: A “less than high” risk assessment means that the auditor believes that internal controls are not effective, in design, in operation, or both.
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 1

A. Statement 1 is correct

Question 2

Statement 1: Tests of controls can be eliminated, while substantive tests cannot be eliminated in an auditor’s program or procedures.
Statement 2: A significant risk refers to a risk that requires special audit consideration
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 2

C. Both statements are correct

Question 3

Statement 1: Further audit procedures include risk assessment procedures, tests of controls, and substantive tests
Statement 2: Tests of controls focus on the effectiveness of controls
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 3

B. Statement 2 is correct

Question 4

Statement 1: If the preliminary controls risk assessment is high, the auditor must perform test of controls to confirm the risk assessment.
Statement 2: Documentation of the understanding of controls is one of the requirements of PSAs.
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 4

B. Statement 2 is correct

Question 5

Statement 1: The control risk assessment may never be revised after the audit program is finalized
Statement 2: The higher the control risk assessment, the higher the reliance on substantive tests.
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 5

B. Statement 2 is correct

Question 6

What is the primary purpose of effective internal control in an organization?
A. Achievement of certain organizational goals.
B. Completion of a successful audit for the entity.
C. Shareholder involvement in the company’s success.
D. Obtaining profitability and financial strength.

Answer 6

A. Achievement of certain organizational goals.

Question 7

Which of the following is the most correct concerning the understanding of internal control needed by auditors to plan the audit?
A. The auditors must understand the control environment, but not the accounting system or control procedures of an entity.
B. The auditors must understand the control environment and the accounting system, but not the control procedures.
C. The auditors must understand the control environment, the accounting system, and must use judgement as to the control procedures which must be considered.
D. The auditors must understand the control environment, the accounting system, and all control procedures.

Answer 7

C. The auditors must understand the control environment, the accounting system, and must use judgement as to the control procedures which must be considered.

Question 8

This is the process designed and effected by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of the entity’s objectives of financial reporting, operations, and compliance.
A. Risk assessment
B. Strategies
C. Internal Controls
D. Operational Plans

Answer 8

C. Internal Controls

Question 9

The auditor uses the understanding of internal control to:
A. Identify types of potential misstatements
B. Consider factors that affect the risk of material misstatements
C. Design the nature, timing, and extent of further audit procedures (i.e. tests of controls and substantive tests)
D. All of these

Answer 9

D. All of these

Question 10

The following statements relate to internal control. Which of the following is incorrect?
A. Internal Control system refers to all the policies and procedures adopted by the management of an entity to assist in achieving management’s objectives.
B. A strong environment does not, by itself, ensure the effectiveness of the internal control system.
C. The internal control system is confined to those matters which relate directly to the functions of the accounting system.
D. In the audit of financial statements, the auditor is only concerned with those policies and procedures within the accounting and internal control system that are relevant to the financial statements.

Answer 10

C. The internal control system is confined to those matters which relate directly to the functions of the accounting system.

Question 11

Internal controls are not designed to provide reasonable assurance that:
A) transactions are executed in accordance with management’s authorization.
B) Irregularities will be eliminated.
C) access to assets is permitted only in accordance with management’s authorization.
D) The recorded accountability for assets are compared with the actual existing assets at reasonable intervals.

Answer 11

B) Irregularities will be eliminated.

Question 12

In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it
A. Enhances management’s decision-making processes
B. Reflects management’s philosophy and operating style
C. Affects management’s financial statement assertions
D. Provides adequate safeguards over access to assets

Answer 12

C. Affects management’s financial statement assertions

Question 13

The following statements relate to internal control. Which statement is incorrect?
A. The entity’s objectives, and therefore controls, relate to financial reporting, efficiency, and effectiveness of operations, and compliance with applicable laws and regulations
B. All objectives and controls are relevant to the auditor’s risk assessment
C. Ordinarily, controls that are relevant to an audit pertain to the entity’s objective of preparing fairly stated financial statements for external purposes
D. The determination of which controls are relevant to an audit is a matter of professional judgement

Answer 13

B. All objectives and controls are relevant to the auditor’s risk assessment

Question 14

What is the relationship between an entity’s objectives and the controls it implements to provide reasonable assurance about their achievement?
A. Direct
B. Inverse
C. Adverse
D. None of these

Answer 14

A. Direct

Question 15

Which of the following statements best describes “control environment”?
a. The entity’s process for identifying business risk relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof.
b. The system for transferring information from transaction processing systems to the general ledger or the financial reporting system.
c. Policies and procedures that help ensure that management directives are carried out.
d. This includes the governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entity’s internal control and its importance to the entity.

Answer 15

d. This includes the governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entity’s internal control and its importance to the entity.

Question 16

Risk can arise or change due to circumstance such as the following except:
a. A new law has been passed which prohibits the use of a chemical which is a main ingredient of the company’s major product.
b. New employees have been hired by the company.
c. The company switched from manual information system to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past five years, and no new pronouncements have been made

Answer 16

d. The accounting and financial reporting framework has remained stable for the past five years, and no new pronouncements have been made

Question 17

2.An entity’s risk assessment process includes how management:
a. Identifies risks
b. Assesses significance and likelihood of occurrence of these identified risks
C. Decides upon actions to manage these risks
D. All of the choices

Answer 17

D. All of the choices

Question 18

Proper segregation of functional responsibilities in an effective system of internal controls calls for separation of the functions of:
A) authorization, execution, and payment.
B) authorization, recording, and custody.
C) custody, execution, and reporting.
D) authorization, payment, and recording

Answer 18

B) authorization, recording, and custody.

Question 19

An entity’s ongoing monitoring activities often include:
A. Periodic audits by the audit committee
B. Reviewing the purchasing function
C. The audit of the annual financial statements
D. Control risk assessment in conjunction with quarterly reviews

Answer 19

B. Reviewing the purchasing function

Question 20

Obtaining an understanding of internal control involves:
I. Evaluating the design of a control
II. Determining whether the control has been implemented III. Testing the effectiveness of controls

A. I and II
B. II and III
C. I and III
D. I, II and III

Answer 20

A. I and II

Question 21

The understanding of internal control that relates to a financial statement assertion should be used to do all of the following, except:
A. Determine inherent risk for that assertion.
B. Identify types of potential misstatements for that assertion
C. Consider factors that affect the risk of material misstatements for that assertion and assess control risk
D. Design substantive test that corresponds with the assessment of control risk

Answer 21

A. Determine inherent risk for that assertion.

Question 22

When obtaining an understanding of an entity’s internal control, an auditor should concentrate on the substance of controls rather than their form because:
A. The controls may be operating effectively but may not be documented
B. Management may establish appropriate controls but not act on them.
C. The controls may be so inappropriate that no reliance is contemplated by the auditor
D. Management may implement controls with costs in excess of benefits

Answer 22

B. Management may establish appropriate controls but not act on them.

Question 23

As part of obtaining an understanding of internal controls, an auditor is not required to:
A. Consider factors that affect the risk of material misstatements
B. Ascertain whether internal control policies and procedures have been placed in operation
C. Identify the types of potential misstatements that may occur
D. Obtain knowledge about the operating effectiveness of internal control

Answer 23

D. Obtain knowledge about the operating effectiveness of internal control

Question 24

When obtaining an understanding of the accounting and internal control system the auditor may trace a few transactions through the accounting system. This technique is:
A. Reperformance
B. Walkthrough
C. Tests of transactions
D. Validity Tests

Answer 24

B. Walkthrough

Question 25

Narratives, flowcharts, and internal control questionnaires are three commonly used methods of
A. Documenting the study of internal controls
B. Testing the internal control structure
C. Designing the audit manual and procedures
D. Documenting the weakness of internal controls

Answer 25

A. Documenting the study of internal controls

Question 26

Statement 1: The auditor ordinarily increases the extent of audit procedures as the risk of material misstatements increases
Statement 2: Control risk may be assessed sufficiently low to warrant elimination of substantive tests
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 26

A. Statement 1 is correct

Question 27

Statement 1: Audit procedures establish broad general goals; audit objectives specify the detailed work to be performed
Statement 2: Analytical review procedures are required all throughout the audit engagement
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 27

D. Both statements are incorrect

Question 28

Statement 1: Before applying the substantive tests to the details of asset accounts at an interim date, an auditor should assess the difficulty in controlling the incremental audit risk
Statement 2: Tests of details are ordinarily more appropriate to obtain audit evidence regarding certain assertions about account balances (except existence and valuation)
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 28

A. Statement 1 is correct

Question 29

Statement 1: Working papers, when properly prepared, serve as a substitute for the client’s financial records
Statement 2: Working papers serve to provide support for the auditor’s report and as a guide in future engagements for the same client
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 29

B. Statement 2 is correct

Question 30

Statement 1: Working papers should be kept on the client’s premises so that the client can have access to them for reference purposes.
Statement 2: Working papers which contain information relating primarily to the audit of a single period are known as permanent files or perma-files
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 30

D. Both statements are incorrect

Question 31

PSA 500 defines audit evidence as:
A. The information obtained by the auditor in arriving at the conclusions on which the audit opinion is based
B. Assertions by management, explicit or otherwise, that are embodied in the FS
C. Tests performed to obtain audit evidence to detect material misstatements in the FS
D. Tests performed to obtain audit evidence about the suitability of design and effective operation of the accounting and internal control operations

Answer 31

A. The information obtained by the auditor in arriving at the conclusions on which the audit opinion is based

Question 32

The objective of the ordinary examination by the independent auditor is the expression of an opinion on:
A. The accuracy of the financial statements
B. The balance sheet and income statement
C. the fairness of the financial statements
D. The annual report of the client enterprise

Answer 32

C. the fairness of the financial statements

Question 33

Management assertions are:
A. Stated in the footnotes to the financial statements
B. Explicitly expressed representations about the financial statements
C. Provided to the auditor in the assertion letter but are not disclosed in the financial statements of the entity
D. Implied or express representations about the accounts in the financial statements

Answer 33

D. Implied or express representations about the accounts in the financial statements

Question 34

Which of the following is a false statement about audit objectives?
A. Audit objectives should be developed in light of management assertions about the financial statement components.
b. Selection of tests to meet audit objectives should depend upon the understanding of internal control.
c. The auditor should resolve any substantial doubt about any of management’s material financial statement assertions d. There should be a one-to-one relationship between audit objectives and procedures

Answer 34

D. There should be a one-to-one relationship between audit objectives and procedures

Question 35

Management assertions are
A. Directly related to Generally Accepted Auditing Standards
B. Directly related to generally accepted accounting standards
C. Indirectly related to Generally Accepted Auditing Standards
D. Indirectly related to generally accepted accounting standards

Answer 35

B. Directly related to generally accepted accounting standards

Question 36

Tests of controls are necessary when:
I. When the auditor’s risk assessment includes an expectation of the operating effectiveness of internal controls.
II. When substantive procedures alone do not provide sufficient appropriate audit evidence
A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 36

C. Both I and II

Question 37

“Physical examination” is the inspection or count by the auditor of items such as:
A. Cash or inventory only
B. Cash, inventory, cancelled checks, and sales documents
C. Cash, inventory, securities, notes receivable, and tangible fixed assets.
D. Cash, inventory, securities, cancelled checks, and tangible fixed assets.

Answer 37

C. Cash, inventory, securities, notes receivable, and tangible fixed assets.

Question 38

Physical examination of tangible assets is not a sufficient form of evidence when the auditor wants to determine the:
A. Existence of the asset
B. Quantity and description of the asset
C. Condition or quality of the asset
D. Ownership of the asset

Answer 38

D. Ownership of the asset

Question 39

Evidence obtained directly by the auditor is more reliable than information obtained indirectly. Which of the following is not an example of the auditor’s direct knowledge?
A. Inspection
B. Observation
C. Computation
D. Inquiry

Answer 39

D. Inquiry

Question 40

Which of the following audit procedures is used extensively throughout the audit but does not, by itself, provide sufficient appropriate evidence?
A. Inspection
B. Observation
C. Computation
D. Inquiry

Answer 40

D. Inquiry

Question 41

Which of the following types of procedures will aid the auditor in obtaining evidence regarding the mathematical accuracy of accounting records and other information?
A. Confirmation
B. Recalculation
C. Inspection
D. Inquiry

Answer 41

B. Recalculation

Question 42

Traditionally, confirmations are used to verify:
a. individual transactions between organizations, such as sales transactions.
b. fixed asset additions.
c. bank balances and accounts receivable.
d. All of the above

Answer 42

c. bank balances and accounts receivable.

Question 43

The appropriateness of evidence available to an auditor is least likely to be affected by:
A. The relationship of the preparer of such evidence to the entity being audited.
B. The relevance of such evidence to the financial statement assertion being investigated.
C. The timeliness of such audit evidence.
D. The sampling method employed by the auditor to obtain a sample of such evidence.

Answer 43

D. The sampling method employed by the auditor to obtain a sample of such evidence.

Question 44

The most reliable forms of documentary evidence are those documents that are
A. internally generated
B. prenumbered
C. authorized by a responsible official
D. Easily duplicated

Answer 44

C. authorized by a responsible official

Question 45

Which of the following procedures would provide the least reliable audit evidence?
A. Inquiries of the client’s internal audit staff held in private
B. Inspection of pre-numbered client purchase orders filed in the vouchers payable department
C. Analytical procedures performed by the auditor on the entity’s trial balance
D. Inspection of bank statements obtained directly from the client’s financial institution

Answer 45

A. Inquiries of the client’s internal audit staff held in private

Question 46

Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:
A. Difficulty and expense involved in testing a particular item
B. Assessment of control risk at a low level.
C. Inherent risk involved
D. Relationship between the cost of obtaining evidence and its usefulness

Answer 46

A. Difficulty and expense involved in testing a particular item

Question 46

Which of the following methods is considered the best combination in obtaining audit evidence assuming documentary evidence is available to the auditor?
A. Inspection and reperformance
B. Observation and inquiry
C. Inquiry and inspection.
D. Inquiry and analytical procedures

Answer 46

C. Inquiry and inspection.

Question 47

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. may be either tests of transactions, tests of balances, or analytical tests.
d. will increase proportionately with the auditor’s reliance on internal controls

Answer 47

c. may be either tests of transactions, tests of balances, or analytical tests.

Question 48

Which statement is incorrect regarding the nature of further audit procedures?
A. The nature of further audit procedures refers to their purpose and their type
B. Certain audit procedures may be more appropriate for some assertions then others
C. The auditor is required to obtain audit evidence about the accuracy and completeness of information produced by the entity’s information system when that information is used in performing audit procedures.
D. The higher the auditor’s assessments of inherent and control risks, the less reliable and relevant is the audit evidence sought by the auditor from substantive procedures.

Answer 48

D. The higher the auditor’s assessments of inherent and control risks, the less reliable and relevant is the audit evidence sought by the auditor from substantive procedures.

Question 49

Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from the following:
A. Comparison of financial date with data for comparable prior periods or anticipated results and similar data for the industry in which the entity operates
B. Study of the relationship of elements of financial data that would be expected to conform to a predictable pattern based upon the entity’s experience
C. Study of the relationships of financial data with relevant non-financial data
D. All of these

Answer 49

D. All of these