Testlet A1-A3 Flashcards
In assessing the objectivity of internal auditors, an independent auditor should:
A. Determine the organizational level to which the internal auditors report.
B. Examine documentary evidence of the work performed by the internal auditors.
C. Evaluate the quality control program in effect for the internal auditors.
D. Test a sample of the transactions and balances that the internal auditors examined.
Choice “A” is correct. When assessing the internal auditors’ objectivity, the auditor should obtain information about whether the internal auditor reports to an officer of
sufficient status to ensure broad audit coverage and adequate consideration of, and action on, the findings and recommendations of the internal auditors.
Which of the following is a management control that most likely could improve management’s ability to supervise company activities effectively?
A. Establishing budgets and forecasts to identify variances from expectations.
B. Limiting direct access to assets by physical segregation and protective devices.
C. Supporting employees with the resources necessary to discharge their
responsibilities.
D. Monitoring compliance with control requirements imposed by regulatory bodies
Choice “A” is correct. The use of budgets and forecasts to identify variances improves managers’ ability to supervise company activities. Variances from budgets serve as
signals to managers that a potential problem exists.
Choice “B” is incorrect. Limiting access to assets serves as a deterrent to employee theft, but does not really improve managers’ ability to supervise company activities.
Choice “C” is incorrect. Supporting employees with adequate resources is important, but it does not necessarily increase the supervisory capability of a manager.
Choice “D” is incorrect. Compliance with controls mandated by a regulatory body may be necessary, but would not necessarily enhance the ability of a manager to supervise company activities
MCQ-03010
Which of the following controls is least likely to be relevant to a financial statement audit?
A. Policies that relate to compliance with income tax regulations.
B. Use of computer passwords to limit access to data files.
C. Procedures that prevent the excess use of materials in production.
D. Generation of production statistics used to evaluate variances.
Choice “C” is correct. Procedures to reduce inefficiency on the production line relate to operational objectives, and not necessarily to financial reporting objectives.
MCQ-02928
Which of the following statements most likely represents a disadvantage for an entity that
keeps microcomputer-prepared data files rather than manually prepared files?
A. Attention is focused on the accuracy of the programming process rather than
errors in individual transactions.
B. It is usually easier for unauthorized persons to access and alter the files.
C. It is usually more difficult to compare recorded accountability with physical count
of assets.
D. Random error associated with processing similar transactions in different ways is
usually greater.
Choice “B” is correct. It is easier to access and alter microcomputer data files than manually prepared data files. Microcomputer access security is difficult to maintain
because of the increased number of data entry points and the potential ability to defeat access controls.
Choice “A” is incorrect. Once the programs are written, the focus will still be on the accuracy of the transactions.
Choice “C” is incorrect. There is no significant difference between comparing physical counts with accounting records kept either manually or on an automated system.
Choice “D” is incorrect. One of the benefits of an automated system over a manual system is the removal of random errors from the process. (Instead, systematic errors
are more common.)
MCQ-02326
An auditor may achieve audit objectives related to particular assertions by:
A. Increasing the level of detection risk.
B. Preparing audit documentation.
C. Adhering to a system of quality control.
D. Performing analytical procedures.
Choice “D” is correct. The auditor relies on substantive tests to achieve audit objectives related to particular assertions. Analytical procedures are one type of substantive
procedure.
Choice “A” is incorrect. Increasing the level of detection risk does not enable the auditor to achieve audit objectives related to a particular assertion.
Choice “B” is incorrect. Audit documentation is used to record the results of audit procedures that have been performed to achieve audit objectives. Mere preparation of
audit documentation does not achieve audit objectives.
Choice “C” is incorrect. CPA firms performing audits are required to adhere to a system of quality control, but adhering to such a system does not directly help the firm achieve
specific audit objectives.
MCQ-02898
As part of understanding internal control, an auditor is not required to:
A. Ascertain whether internal controls have been implemented.
B. Consider factors that affect the risk of material misstatement.
C. Identify the types of potential misstatements that can occur.
D. Obtain knowledge about the operating effectiveness of internal control
Choice “D” is correct. 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.
Choice “A” is incorrect. Ascertaining whether controls have been implemented is required as part of obtaining an understanding of internal control.
Choice “B” is incorrect. Considering factors that affect the risk of material misstatement is a part of understanding internal control.
Choice “C” is incorrect. Identifying the types of potential misstatements that can occur is part of understanding internal control.
MCQ-02602
As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the
population was:
A. Less than the deviation rate in the auditor’s sample.
B. More than the risk of assessing control risk too low, based on the auditor’s
sample.
C. Less than the risk of assessing control risk too low, based on the auditor’s sample.
D. More than the deviation rate in the auditor’s sample.
Choice “D” is correct. If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be understated, because the control will be less effective than sample results would indicate.
Choice “A” is incorrect. If the true deviation rate is lower than the deviation rate in the sample, control risk may be assessed at a rate that is too high, potentially leading to audit inefficiencies.
Choice “B” is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low.
Choice “C” is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low.
MCQ-04710
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of a control activity?
A. Inquiry of client personnel.
B. Preparation of system flowcharts.
C. Inspection of documents and reports.
D. Observation of client personnel.
Choice “B” is correct. Preparation of system flowcharts may aid in the auditor’s understanding of the system of internal control, but would not indicate whether controls
were actually operating as designed.
MCQ-02421
The audit plan usually cannot be finalized until the:
A. Consideration of the entity’s system of internal control has been completed.
B. Representation letter has been signed by the client.
C. Search for unrecorded liabilities has been performed and documented.
D. Significant deficiencies in internal control have been communicated to those
charged with governance.
Choice “A” is correct. The auditor should obtain a sufficient understanding of the entity and its environment, including its system of internal control, to plan the audit of the
entity’s financial statements.
Choice “B” is incorrect. The representation letter is not obtained until the end of the audit.
Choice “C” is incorrect. The search for unrecorded liabilities typically takes places after year-end, while the audit plan is prepared during planning. Information obtained from
the search is not needed to finalize the audit plan.
Choice “D” is incorrect. Informing those charged with governance of significant deficiencies in internal control generally occurs during or at the completion of the audit.
It is not required before completion of the audit plan.
MCQ-02881
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?
A. Sampling for variables.
B. Numerical sampling.
C. Sampling for attributes.
D. Discovery sampling.
Choice “A” is correct. Variables sampling is used to estimate a numerical measurement of a population, such as the dollar value or the dollar value of errors in the population.
Choice “B” is incorrect. The term “numerical sampling” is not used in statistical sampling and is merely a well-designed distractor.
Choice “C” is incorrect. Attribute sampling is sampling for errors (or some other attribute). The auditor determines whether the attribute appears or not, but does not try
to estimate a numerical measurement of the population.
Choice “D” is incorrect. Discovery sampling is a special case of sampling for “attributes” (errors) where the auditor’s initial estimate of error occurrence is zero or near zero. It
does not sample for dollar value.
When a qualified opinion results from a limitation on the scope of the audit of a nonissuer, the situation should be described in a Basis for Modification paragraph:
A. Following the opinion paragraph and referred to in both the introductory and
opinion paragraphs of the auditor’s report.
B. Preceding the opinion paragraph and referred to only in the introductory
paragraph of the auditor’s report.
C. Following the Opinion section, should have the heading “Basis for Qualified
Opinion” and should describe the reasons for the inability to obtain sufficient
appropriate audit evidence.
D. Following the opinion paragraph and referred to only in the management’s
responsibility paragraph of the auditor’s report.
Choice “C” is correct. When a qualified opinion results from a limitation of scope, it should be described in an Basis for Qualified Opinion section following the Opinion section and it should describe the reasons for the inability to obtain sufficient appropriate audit evidence. Furthermore, the Opinion section should have the heading “Qualified Opinion.”
Choice “A” is incorrect. There is no introductory paragraph in the auditor’s report. Additionally, the Opinion section should contain “except for…” language.
Choice “B” is incorrect. The Basis for Qualified Opinion section should follow the
opinion paragraph, and there is no introductory paragraph in the auditor’s report.
Choice “D” is incorrect. The Management’s Responsibility section remains unchanged
from the standard report when a qualified opinion is issued.
MCQ-04299
An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately:
A. Adopt an attitude of acceptance unless evidence indicates otherwise.
B. Authenticate documents used as audit evidence.
C. Consider the reliability of information to be used as audit evidence.
D. Assess the entity’s document-retention controls before using documents as audit
evidence.
Choice “C” is correct. An auditor exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately consider the
reliability of information to be used as audit evidence.
Choice “A” is incorrect. An auditor exercising professional skepticism should critically
assess audit evidence rather than adopting an initial attitude of acceptance.
Choice “B” is incorrect. An auditor is not required to authenticate audit evidence. The
auditor may accept records and documents as genuine unless the auditor has reason
to believe the contrary.
Choice “D” is incorrect. An auditor exercising professional skepticism does not need to
assess the entity’s document-retention controls before using documents as audit
evidence.
MCQ-15025
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:
A. Emphasizes that the financial statements are not intended to have been audited in accordance with generally accepted auditing standards.
B. States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
C. Refers to the authoritative pronouncements that explain the income tax basis of accounting being used.
D. Justifies the use of the income tax basis of accounting.
Choice “B” is correct. When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that states that the income tax basis of accounting is a basis of accounting other than GAAP. Examples of an appropriate title for this paragraph are “Emphasis of Matter” or “Basis of Accounting.”
Choice “A” is incorrect. The financial statements are audited in accordance with GAAS.
Choice “C” is incorrect. The report does not refer to the authoritative pronouncements
that explain the income tax basis of accounting being used.
Choice “D” is incorrect. The special report does not justify the use of the income tax
basis of accounting.
When obtaining an understanding of an entity’s controls, an auditor should concentrate on the substance of the controls rather than their form because:
A. The procedures may be operating effectively but may not be documented.
B. Management may establish appropriate procedures but not enforce
compliance with them.
C. Management may implement procedures whose costs exceed their benefits.
D. The procedures may be so inappropriate that no reliance is contemplated by
the auditor.
Choice “B” is correct. “Substance over form” concerns relate to controls that appear on the surface to exist but in reality are not operating effectively. When obtaining an understanding of a client’s system of internal control, an auditor should concentrate on the substance of controls rather than the form because even when appropriate procedures are established, management may not enforce compliance.
Choice “A” is incorrect. “Substance over form” concerns relate to controls that appear on the surface to exist but in reality are not operating effectively. Procedures that are
operating effectively, even if they are not documented, do not illustrate this situation.
Choice “C” is incorrect. While the cost-benefit of internal control is of concern to
management in the design of the system, it plays no role in the auditor’s attempt to gain
an understanding of internal controls.
Choice “D” is incorrect. The auditor should first obtain an understanding of the controls
in order to determine whether the controls are appropriate or inappropriate. The auditor
would not focus at all on controls deemed to be inappropriate.
