Question 1

An auditor tests a sample of transactions for proper authorization. Assume the auditor performs test of transactions and concludes that the authorization control is operating effectively when in fact it is not, this is termed:
A) sampling error.
B) sampling risk.
C) detection error.
D) All of the above.

Accepted Answer

The answer of An auditor tests a sample of transactions...

Question 2

Auditor A accepts a client in an industry where change is constant and rapid. Such a client presents which type of risk:
A) engagement risk.
B) inherent risk.
C) control risk.
D) detection risk.

Accepted Answer

The rapid and constant change in the client's industry points towards inherent risk - the risk that exists in the client's environment, irrespective of the quality of internal controls or audit procedures. Auditors will need to consider this risk while planning and executing the audit. Engagement risk is the risk that the auditor is exposed to by accepting a particular client, control risk is the risk that a misstatement will not be prevented or detected by the client's internal controls, and detection risk is the risk that the auditor's substantive procedures will not detect a misstatement.

Question 3

Which of the following transactions is considered a related-party transaction?
A) Borrowing funds from the pension fund maintained by the company.
B) Transferring monies to a subsidiary.
C) Selling inventory to a parent.
D) All of the above.

Accepted Answer

The answer of Which of the following transactions is considered...

Question 4

All things being equal, as the risk of assessing control risk too low __________; sample size __________:
A) increases; decreases.
B) increases; increases.
C) decreases; decreases.
D) None of the above.

Accepted Answer

When the risk of assessing control risk too low increases, it means that the auditor believes that controls are more effective than they actually are, leading to a higher chance of not detecting material misstatements. To compensate for this, the auditor should increase the sample size to increase the likelihood of detecting any potential errors or fraud. Therefore, as the risk of assessing control risk too low increases, the sample size should also increase.

Question 5

The client's correct interpretation of GAAP in company policies is approved by:
A) the board of directors.
B) top financial management.
C) the audit committee.
D) Both b and c

Accepted Answer

The client's interpretation of GAAP in company policies is ultimately approved by top financial management, such as the Chief Financial Officer (CFO), and the audit committee of the board of directors. Therefore, choices B and C are both correct.

Question 6

If the auditor expects that internal control is weak, then this implies that:
A) the sample size should increase.
B) the tolerable rate of deviation should increase.
C) the expected rate of deviation should increase.
D) Both a and c

Accepted Answer

When an auditor expects that internal control is weak, they anticipate a higher rate of deviation from prescribed control procedures (C), which in turn means they will likely increase the sample size (A) to obtain a more accurate understanding of the control's effectiveness.

Question 7

Which of the following is an illegal act that has an indirect effect on the financial statements?
A) Fraud detected in the payment cycle by the auditor.
B) Bribing local officials for favorable lease terms.
C) Failure to pay required taxes.
D) Placing foreign substances in food in an effort to save money.

Accepted Answer

The answer of Which of the following is an illegal...

Question 8

An auditor concludes that the internal controls are not operating effectively when in fact they are. This most likely would result in:
A) a qualified opinion on the ICFR.
B) additional substantive testing.
C) additional scope requirements.
D) All of the above.

Accepted Answer

When an auditor incorrectly concludes that internal controls are not operating effectively, they are likely to perform additional substantive testing to compensate for the perceived lack of reliability in the controls. This is done to ensure the financial statements are free of material misstatement.

Question 9

The auditor discovers that the likely rate of deviation in a population is increasing. This affects:
A) the sample size.
B) the tolerable rate of deviation.
C) the risk of assessing control risk too low.
D) All of the above.

Accepted Answer

An increase in the likely rate of deviation in a population would require the auditor to increase the sample size to maintain the same level of assurance.

Question 10

As AP risk decreases, then:
A) detection risk increases.
B) audit risk decreases.
C) inherent risk increases.
D) Both a and b

Accepted Answer

As AP risk decreases, audit risk decreases as well. This is because when the risk of misstatement in the accounts payable is lower, there is less likelihood of material misstatements in the financial statements, which reduces the overall audit risk. Detection risk is not affected by changes in AP risk, as it is determined by the auditors' testing procedures. Inherent risk would also decrease as AP risk decreases, as inherent risk is the risk associated with a particular account or balance before considering the effectiveness of internal controls.

Question 11

If serious control deficiencies are detected prior to year-end and management implements changes to its systems to correct the deficiencies, the auditor:
A) must retest the ITGC again to ensure no additional deficiencies exist.
B) cannot rely on the ICFR in planning its financial statement audit.
C) must test the changes made to the system to determine if the deficiency was resolved.
D) All of the above.

Accepted Answer

The auditor must test the changes made to the system to determine if the deficiency was resolved. This is because the implementation of changes to correct serious control deficiencies indicates that management is committed to maintaining effective control over financial reporting. However, the auditor must still test the changes made to ensure that the deficiency was indeed resolved. It is not necessary to retest the ITGC again, as the changes made should be sufficient to correct the deficiencies. The auditor can still rely on the ICFR in planning its financial statement audit, as long as the changes made are effective in remedying the deficiencies.

Question 12

Examples of controls tested in the period-end financial reporting process include:
A) an estimation of the contingent liabilities at year-end.
B) a review of appropriate authorization over paid invoices.
C) the client's accounting policies conform to GAAP and/or IFRS.
D) All of the above.

Accepted Answer

The answer of Examples of controls tested in the period-end...

Question 13

The risk of associating with a client known to have a dubious reputation for honesty is referred to as:
A) audit risk.
B) detection risk.
C) engagement risk.
D) Both b and c

Accepted Answer

The risk of associating with a client known to have a dubious reputation for honesty is referred to as engagement risk. This refers to the risk that the auditor may be associated with the client's dishonesty, which could lead to damage to the auditor's reputation, legal liability, or financial loss. Detection risk refers to the risk that the auditor may fail to detect a material misstatement in the financial statements, while audit risk is the combination of inherent risk, control risk, and detection risk.

Question 14

An auditor concludes that the internal controls are operating effectively when in fact they are not. This most likely would result in:
A) reduced audit testing.
B) increased detection risk.
C) increased audit risk.
D) All of the above.

Accepted Answer

When an auditor incorrectly concludes that internal controls are operating effectively, they may reduce the extent of their audit testing, believing the risk of material misstatement to be lower. This can lead to an increased detection risk, as the auditor is less likely to detect material misstatements. Consequently, the overall audit risk, which is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated, also increases.

Question 15

Sample size increases as the:
A) risk of assessing control risk too high increases.
B) risk of assessing control risk too low decreases.
C) tolerable rate of deviation increases.
D) All of the above.

Accepted Answer

As the sample size increases, the risk of assessing control risk too low decreases. This is because a larger sample size provides more representative evidence about the true operating effectiveness of the control. Increasing the sample size does not affect the risk of assessing control risk too high or the tolerable rate of deviation. Therefore, option B is the best choice.

Question 16

An auditor tests a sample of transactions for proper authorization. She concludes that the control is not operating effectively, although it actually is. This is an example of:
A) sampling error.
B) sampling risk.
C) detection risk.
D) All of the above.

Accepted Answer

This is an example of sampling risk, which is the risk that the auditor reaches an incorrect conclusion based on the sample tested. It is not a sampling error because the auditor is not making a mistake in the selection or execution of the sample, and it is not detection risk because the control is actually operating effectively but is being misinterpreted by the auditor.

Question 17

Benchmarking is appropriate when:
A) client ITGC are strong.
B) client application controls are operating effectively.
C) the application program has not changed.
D) All of the above.

Accepted Answer

Benchmarking is appropriate when client ITGC (Information Technology General Controls) are strong, client application controls are operating effectively, and the application program has not changed. These conditions ensure that the benchmarked processes are reliable and consistent over time.

Question 18

Which of the following risks can the auditor control:
A) audit risk.
B) detection risk.
C) inherent risk.
D) control risk.

Accepted Answer

The answer of Which of the following risks can the...

Question 19

Client A has equity interests in several affiliates. In addition, Client A sits on the Board of Directors for Company B, one of the affiliates. If Client A decides to appoint his spouse as the managing director at Company B, then which of the following would be an example of a related-party transaction?
A) Sales between Client A and all of its affiliates.
B) Sales between Client A and Company B.
C) Sales from Company B to another of Client A's affiliates.
D) All of the above.

Accepted Answer

All of the options describe transactions between parties that are related through ownership, control, or influence, making them related-party transactions. Client A's equity interests in affiliates and position on the Board of Directors of Company B, combined with the appointment of his spouse as managing director, create relationships that influence transactions among these entities.

Question 20

To rely on the ICFR in the financial statement audit, the auditor must:
A) test the ITCG at both interim and year-end.
B) assess the control risk below maximum.
C) Both a and b.
D) Neither a nor b.

Accepted Answer

To rely on the Internal Control over Financial Reporting (ICFR) in the financial statement audit, the auditor must test the Information Technology General Controls (ITGC) at both interim and year-end, and assess the control risk below maximum. This ensures that the auditor has a strong understanding of the control environment and can rely on the controls in place.

Quiz 8: Planning and Testing Operating Effectiveness of Internal Control Over Financial Reporting

An auditor tests a sample of transactions for proper authorization. Assume the auditor performs test of transactions and concludes that the authorization control is operating effectively when in fact it is not, this is termed:

Auditor A accepts a client in an industry where change is constant and rapid. Such a client presents which type of risk:

Which of the following transactions is considered a related-party transaction?

All things being equal, as the risk of assessing control risk too low ; sample size :

The client's correct interpretation of GAAP in company policies is approved by:

If the auditor expects that internal control is weak, then this implies that:

Which of the following is an illegal act that has an indirect effect on the financial statements?

An auditor concludes that the internal controls are not operating effectively when in fact they are. This most likely would result in:

The auditor discovers that the likely rate of deviation in a population is increasing. This affects:

As AP risk decreases, then:

If serious control deficiencies are detected prior to year-end and management implements changes to its systems to correct the deficiencies, the auditor:

Examples of controls tested in the period-end financial reporting process include:

The risk of associating with a client known to have a dubious reputation for honesty is referred to as:

An auditor concludes that the internal controls are operating effectively when in fact they are not. This most likely would result in:

Sample size increases as the:

An auditor tests a sample of transactions for proper authorization. She concludes that the control is not operating effectively, although it actually is. This is an example of:

Benchmarking is appropriate when:

Which of the following risks can the auditor control:

To rely on the ICFR in the financial statement audit, the auditor must: