Deck 8: Tests of Control and Substantive Test Implications

Question 1

The challenge in a financial report audit is to find the most cost-effective manner in which to develop sufficient evidence to render an opinion on the financial report.

Answer 1

True

Question 2

In assessing an entity's internal controls, the auditor does not complete preliminary analytical procedures.

Answer 2

False

Question 3

Recent research by COSO reinforces the concept that the control environment is not a very important factor associated with test of controls.

Answer 3

False

Question 4

The area of accounting judgements and estimates is almost always considered low risk.

Question 5

The auditor should identify the types of risk that could cause misstatement in the material account balances and the processes that would allow the misstatement to occur.

Question 6

The external auditor must perform enough work to make an independent decision about the quality of the client's internal controls.

Question 7

A top-down, risk-based approach to a financial report audit requires auditors to consider the materiality of account balances.

Question 8

The external auditor is required to issue two separate reports - one on the fairness of the internal controls and a second on the fairness of the financial statements.

Question 9

The external auditor determines important controls that need to be tested for the purposes of formulating an opinion on the entity's internal controls.

Question 10

The external auditor will often consider the work performed by the internal auditor

Question 11

The auditor must consider the effect of the controls on the likely misstatement of financial account balances and on the substantive testing that needs to be performed.

Question 12

The auditor performs a walkthrough of the processes and concludes that the design of controls
addresses the relevant assertions, and that if the controls are operating effectively, the auditor
could conclude that internal control over financial reporting is effective.

Question 13

In deciding how to categorise a weakness, management and auditors should not consider the nature of the deficiency.

Question 14

The control environment plays a critical role in influencing the total risk management process.

Question 15

The risk-based audit approach requires the auditor to:

A) accept management's judgements
B) identify potential causes of the misstatement
C) ignore changes in accounting policies
D) rely on internal valuations for material assets

Question 16

Increased substantive testing is required when the auditor finds:

A) a significant weakness in the internal controls of the client
B) unexpected mitigating controls
C) corroborating evidence
D) no unusual fluctuations in the analytical procedures

Question 17

When an auditor assesses controls as operating effectively, the auditor could conclude that:

A) the internal controls over financial reporting had a significant deficiency
B) there was no need to conduct substantive procedures
C) the control environment was weak
D) internal control over financial reporting is effective

Question 18

In planning the audit, auditors assess control risk for:

A) all assertions
B) important classes of transactions
C) all account balances
D) management judgements

Question 19

When determining if the sales are proper and the receivables are valid, the auditor could:

A) send confirmations to customers inquiring of the account balance and the terms of the contract
B) reconcile the Inventory Control account
C) reconcile the Accounts Payable Control account
D) reconcile the Accounts Receivable Control account

Question 20

Which of the following accounts is not related to the revenue and cost of goods sold process?

A) accounts payable
B) inventory
C) accounts receivable
D) revenue

Question 21

The auditor will need to determine that any whistleblower program is effective by:

A) reading the Code of Ethics
B) monitoring all complaints
C) what information the board or the audit committee receives regarding the
nature of whistleblower complaints
D) discussions with the internal auditor

Question 22

Which of the following accounts is not related to the purchasing process?

A) accounts payable
B) inventory
C) accounts receivable
D) expenses

Question 23

Which of the following accounts would not be considered significant for a non-manufacturing company?

A) inventory
B) revenue
C) raw materials
D) cost of goods sold

Question 24

Large public company audited financial report is required to be accompanied by:

A) management's report on internal control over financial reporting
B) an external audit report on the financial report
C) the internal auditor's report on the financial report
D) management's report on the financial report

Question 25

When assessing the risk of material misstatement, which of the following would the auditor consider to be a management motivation for account misstatements?

A) transaction processing of high volumes of material transactions
B) IT risks and vulnerabilities
C) share market performance and debt covenants
D) processes affecting major estimates and adjusting entries

Question 26

In the procurement process which of the following controls would the auditor determine to be key controls?

A) Only authorised goods are purchased from authorised vendors.
B) Payments are made in a timely fashion.
C) All purchases are recorded in a timely fashion and are appropriately classified.
D) All of these choices.

Question 27

The auditor could assess control risk for an account at the maximum when:

A) immaterial control deficiencies exists in the account
B) significant control deficiencies exists in an account
C) material weaknesses exists in an account
D) all of these choices

Question 28

In a financial report audit, the amount of direct testing of account balances is inversely related to:

A) subjectivity of estimates
B) riskiness of the account
C) effectiveness of internal control
D) materiality of the account

Question 29

The extent of testing for computerised controls is not influenced by:

A) review of exception reports
B) results of test transactions through the system
C) changes in the computer program during the year
D) cost/benefit analysis

Question 30

Direct testing examines:

A) controls
B) processes
C) account balances
D) transactions

Question 31

Management's assessment of controls
Weaknesses in internal control are classified as a deficiency or a significant deficiency. Identify the factors that management and auditors should consider when categorising identified control weaknesses.

Question 32

Auditor assessment of controls
Discuss the purpose of the auditor performing a walkthrough of processes and how the results are used to determine if there is a deficiency or a significant deficiency.

Question 33

Planning a financial report audit
Discuss the different steps and phases that are required in planning a financial report audit.

Question 34

Changes in guidance
What are the major changes in guidance since the introduction of auditing standards?

Question 35

Identifying audit work
What are the fundamental questions that the auditor must address to determine the optimal amount of audit work?